Into 2010 —Views on Sustainability of Recovery

Into the new decade beginning 2010 much of the Global economy is technically out of recession, thanks to the unprecedented synchronized monetary and fiscal stimulus provided by governments across the globe, even though major economic indicators continue to see-saw. The combination of improvement in the functioning of financial markets, higher prices for risky assets and the recent slower pace of tightening bank lending standards are expected to increase the chances for sustainable recovery according to the Global Economic Forum of Morgan Stanley. A slower pace of inventory liquidation and a gradual shift to inventory accumulation should add to growth. Past aggressive payroll cuts may now give rise to an increase in demand for labour and help to strengthen recovery. GEF points out that inflation risk will be a crucial factor for markets henceforth; as (particularly due to rising commodity price inflation) market-based inflation expectations are gradually rising. The end of easing and beginning of exit can be expected to cause wobbles in financial markets pushing inflation premia and thus bond yields significantly higher. The aggressive provision of stimulus has also theoretically led to significant increase in sovereign fiscal balances and default risks, which also pushes up bond yields.
Another threat to the nascent recovery in the form of existing global imbalances of distortionary /risky nature has been discussed in an IMF policy note, which points out that crisis induced changes in saving and investment patterns across the world have narrowed previously rising imbalances considerably. However, policy measures are required to correct for distortionary effects of — large current account deficit in the US, high oil prices and the large savings of oil exporters, high and rising saving rates in China, the investment boom driven by asset prices in peripheral Europe, the collapse in investment in emerging Asia (excluding China) and in Japan. An increase private and public US saving, an increase in social insurance, strengthening corporate governance, and implementation of reforms to increase access to credit for households and SMEs in China, a move from export-led towards more domestic-demand led growth in a number of emerging market countries, room for higher domestic demand and more spending on social infrastructure needs in some oil-exporting countries would help global rebalancing and ensure sustainability of recovery.
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