Has Global Economic Recovery Already Occurred?

Recently, Thailand’s stock index dropped 12.96 points, stopping at 987.77 points; in the same direction as other stock markets in the region; all in response to investor concern over Ireland’s debt problem, plus a possible interest rate increase again by China’s government to control inflation. Due to 4.4% growth in China’s consumer price index (CPI) in October, which was the highest rate in two years period, China therefore increased its interest rate 0.25% in October 2010, for the first time in three years. Moreover, this year, China’s government has already increased the ceiling reserve of commercial banks fives times over.

How paradoxical it seems that China must increase its interest rate in order to control inflation because the Chinese economy continues to grow strongly while Europe’s economy is facing a public debt problem and economic slowdown. A question therefore is whether the global economy has already recovered from the crisis yet, and whether this recovery is strong or not, and what is the trend of this recovery?

Has the global economy recovered from crisis yet?

In my opinion, from economic figures released, the global economy may be considered recovered. This is because the global economy has grown over two consecutive quarters after the recession in 2009 that was due to the sub-prime mortgage crisis. In early 2009, GDP contracted by -0.6% compared to 2008. However, global GDP growth began to change from "negative" to "positive" from the second half of 2009. The economic growth rate increased equal to or higher than pre-crisis levels. Then, in the first half of 2010, global GDP expanded by 5.25% with the world economy expected to grow by 4.8 percent throughout 2010.

However, this recovery that has occurred is varied, depending on the economic bloc. The emerging economies, for example in Asia’s developing countries, have high growth rates, with economic growth expected to have increased from 6.9% in 2009 to 9.4% in 2010. Chinese economic growth will increase from 9.1% to 10.5% in 2010 and the ASEAN 5 countries (Indonesia, Malaysia, Philippines, Singapore and Thailand) will experience growth from 1.7% to 6.6% in 2010. Economic growth in the industrial countries will expand by 2.7% in 2010, increased from - 3.2% in 2009.

Is the recovery of the global economy strong or not?

I think that global economic recovery is not strong yet, especially in the developed countries, as we can see from the following factors:

Unemployment is still high
In developed countries, the growth of retail sales plus the consumer confidence index are still low. This is a result of the steep unemployment rate, which has remained as high as in the period of the crisis. In the USA, the unemployment rate was 9.6% in September 2010 while in the Euro zone it was 10.1% in August 2010; the unemployment rate was 5.2% in Japan in August 2010.

Budget deficit and public debt as a percent of GDP has increased
We cannot deny that rapid economic recovery is partly a result of the budget deficit policy of governments in many countries around the world that have increased their government budgets by enormous amounts in order to stimulate their economies. Although the adoption of a budget deficit policy will result in quick economic recovery, it causes another problem, which is the growth of public debt.

Many European countries are facing public debt issues, such as Ireland, Portugal, Spain, and especially Greece which has already entered into economic downturn. Nowadays, public debt in the developed countries has increased rapidly from 48.2 % of GDP in 2007 to 70.7% of GDP, while the public debt to GDP ratio in emerging economies is quite stable. Therefore, the governments of developed countries are more limited in their use of fiscal policy in order to stimulate their economies. They need to reduce their fiscal deficit, as we can see in Spain and Portugal’s implementation of fiscal austerity policies. Meanwhile, Germany and France are trying to reduce their budget deficit and public debt in order to avoid a debt crisis that may cause their economic recovery to lack in continuity.

A high unemployment rate and an increase in budget deficit and public debt will be problematic to the stable sustainability of global economic growth in the next stage.

Besides these issues on whether the global economy has yet recovered from the crisis and whether global economic recovery is strong or not, there are many interesting questions about the global economic recovery, which I will try to answer on the next occasion.

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com