The world economy is close to toppling into a recession, but a recent improvement in confidence on the heels of massive, concerted central bank easing may halt the slide, Stanley Fischer, the head of the Bank of Israel, told CNBC.
“Stock markets are up, possibly (because of) QE3 in the United States,” he said in an interview in Jerusalem, referring to quantitative easing in the U.S.
Additionally, he said European Central Bank, Bank of Japan and recently announced Chinese measures had helped financial markets. “So we may be seeing improvement, but it was going down before that,” he added.
Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.
Fischer was cautiously optimistic about the impact of a third round of quantitative easing (QE3) by the Federal Reserve, even as he warned that the uncertainties about fiscal policy were having a big impact on the U.S. economy.
“The empirical evidence is that it's actually quite effective, and we'll see,” said the former chief economist at the International Monetary Fund. “This one is aimed very much at the mortgage markets, and housing had already been making a comeback in the United States so this might give it a push.”
Fischer told CNBC uncertainties about how to correct the fiscal deficit in the U.S. was having a major impact on investment and spending decisions, and U.S. politicians would need to resolve the issue as quickly as possible.
“It'll be good to get a plan for dealing with it on the table, one that's credible, so the sooner the better, but obviously not before the elections,” he said.
He said Israeli monetary policy makers were prepared in case tensions heated up with Iran over its alleged efforts to develop nuclear weapons.
The Israeli economy will continue to be Fischer’s main focus. Prime Minister Benjamin Netanyahu has called early elections in a bid to win voters’ backing for a budget which would raise taxes and government spending.
Meanwhile, other economic experts are also depicting a dire future for the global economy.
“Either the economies of the world have got to come to life and rise to meet investor expectations, or investors have got to come down to earth,” economist Gary Shilling told Yahoo. “The latter is more likely.”
And Shilling sees thing getting worse for economies around the world. “We could very well be in a global recession in 2013,” he said.
The economist acknowledges that signs of strength have emerged in the consumer and housing sectors, but notes that the industrial sector is weak, particularly exports.
And it’s not going to end soon, he said. “My hunch is … at this rate it will take another five to seven years to complete that [deleveraging].” This is normal, as it usually takes 10 years to deleverage from a huge financial crisis, Shilling said.
Others agree.
“The deep, prolonged decline, and the slow halting recovery are inevitable after a major systemic financial crisis,” Harvard economist Kenneth Rogoff, who has studied centuries of financial meltdowns, told The Wall Street Journal.
The International Monetary Fund warned earlier this month in its economic outlook that “risks for a serious global slowdown are alarmingly high.”
Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.
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