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A Great Recession, not a Great Depression Written by Gerard Lyons
Wednesday, 06 May 2009 23:52
THIS is not the Great Depression. But it has been called a Great Recession. It certainly is a deep crisis, the outcome of which will depend on the fundamentals, the policy response and confidence. Here, I focus on the policy debate.
To understand what is happening, it may be helpful to view current events as part of the shift in the balance of power from the West to the East. This shift will take many years. But happening it is. And this not only has a bearing on the current recession, it also has huge implications for the type of recovery we are likely to see.
Two key factors contributed to this crisis. One was the imbalanced nature of the world economy. The other was systemic failure within the financial system. Fixing the two will not be straightforward and will take time.
Even though there is a need in the future for a more balanced global economy, the key now is demand. Boosting demand, even if it delays the move to a more balanced world economy, may be better than the alternative, which could be an ever-deepening downward spiral.
Equally, within the financial sector, it is vital to fix the parts that were broken, but not everything needs fixing. Many parts of the financial system worked well and, even in the parts that broke, there were well-run institutions that did not get into trouble.
All of which suggests the need to differentiate, from both an economic and a financial-markets perspective, between the immediate outlook and the longer-term issues.
The Group of 20 (G20) London summit was an important step towards finding a global solution. Gordon Brown, Barack Obama and Hu Jintao were instrumental to its success.
Some in Asia have even referred to it as the G2.5 Summit, with the focus on China and the US, and the UK seen as good hosts!
The Chinese were proactive in the run-up to the summit, reflecting their desire to share — and to be seen to be sharing — the common agenda of mending the economic and financial failures.
The all-inclusive nature of this meeting was welcome given the synchronised nature of the downturn. The very fact that this gathering was held was in itself a sign of how things are changing. There has been a growing need for global policy fora to give a greater weight to emerging economies.
The need to restore lending has been an ongoing issue throughout this crisis, and the collapse in trade since last autumn has been alarming.
Thus, perhaps the most welcome aspect was the commitment by the G20 to “ensure availability of at least US$250 billion (RM880 billion) over the next two years to support trade finance” by export credit and investment agencies and the multilateral development banks.
Of the other measures outlined, additional money for the International Monetary Fund (IMF) was a big plus, particularly as it will help the fund to respond as the crisis hits harder. A commitment to future reform of the fund was also implicit in the G20 statements. Again, this is a long-overdue positive and a further sign of the shift in the balance of power.
The new Financial Stability Board, announced by the G20 as the successor to the Financial Stability Forum, had its membership extended to include all G20 countries and its mandate broadened to promote financial stability. The net effect will be to give greater weight to emerging countries in overseeing the financial sector.
It is worth stressing that as welcome as these new initiatives from the G20 are, they are unlikely to be able to stop the recession quickly. But they should, along with measures already taken and still more yet to be taken, be able to limit the downside and shorten the downturn.
In that sense, the London Summit should be seen as work in progress. It follows a host of other policy measures which are yet to feed through fully. When one looks across countries, the policy measures unveiled so far in this crisis effectively fall into four distant categories:
support to the financial sector, including liquidity provision, funding guarantees, capital injection, and removing impaired assets from bank books,
exchange rate policy
fiscal policy, and
monetary policy
The scale of international fiscal and monetary policy easing — and the prospect of more to come — is having an impact by minimising the downside for the global economy. The question is when it will allow economies to turn the corner and recover.
Even though the scale of the stimulus is huge, it is fighting to offset strong downward pressures. There are three combined deflationary forces:
the balance-sheet restructuring across the corporate and household sectors and the deleveraging within the financial sectors in many countries, particularly in the West;
the severe inventory reduction underway as demand weakens; and
the collapse in world trade.
The downside pressures are still winning, but the rate of decline is easing. And previous policy measures may finally be feeding through.
Dr Gerard Lyons is chief economist at Standard Chartered. The final article of this two-part series will appear on Friday.
