Tags: FT | Wolf | Crisis | Economy

FT’s Martin Wolf: Five Years Into Crisis, Global Economy Still Dismal

Wednesday, 11 Jul 2012 07:48 AM

Five years after the global economy began to collapse in August of 2007, the world's major economies are largely no better off, writes Financial Times columnist Martin Wolf.

"Of the six largest high income economies (plus the eurozone), only those of the U.S. and Germany are above previous peaks. Since the U.S. was the epicenter of the early shocks, its recovery has been relatively good. Yet none of these countries can be happy with its performance," Wolf writes in his column.

The U.S. economy, which is performing much better than its European counterparts, has experienced spotty recovery at best marked mainly by high unemployment rates.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

"While U.S. gross domestic product has been more buoyant than that of these other countries, its unemployment rate more than doubled, from 4.7 percent in July 2007 to 10 percent in October 2009. Since then its unemployment has fallen only a little."

Central banks have slashed interest rates and injected liquidity into their respective economies, often swelling their balance sheets in the process by buying up assets held by banks to foster conditions for lending and hiring.

Going forward, economies need to strike a balance between encouraging growth and cutting spending, and resist calls for rolling out too much austerity measures that would obliterate growth with the aim of paying down debts.

"Far too much policy making and advice neither recognizes the post-crisis challenges nor crafts effective answers. The heart of the matter is accelerating de-leveraging, while promoting recovery," Wolf writes.

"By that standard, the policies now in place are, alas, very far from good enough."

Fears the global economy is poised to get even worse are growing.

Concerns that the European debt crisis will worsen and result in Greece and possibly other countries defaulting and abandoning the euro have rattled markets, bruised confidence and crimped the global economy.

In the U.S., growth remains tepid and jobs reports consistently disappoint, which depicts an economy limping along its road to recovery at best.
Fitch Ratings recently upheld U.S. ratings, saying it was sticking with its top-notch AAA rating.

The outlook for the U.S., however, remains negative, which means downgrades are possible.

At the end of this year, a series of tax breaks are set to expire at the same time spending cuts kick in, a combination known as a fiscal cliff that could siphon hundreds of billions of dollars out of the economy and derail recovery.

Failure to address the fiscal cliff could result in a downgrade.

"The Negative Outlook also reflects the risks associated with the lack of broad public and political agreement on how to secure deficit reduction. The uncertainty over tax and spending policies associated with the so-called 'fiscal cliff' weighs on the near-term economic outlook," Fitch analysts write.

"Moreover, the burden of government debt on the economy will continue to rise with potentially adverse implications for potential growth as well as increasing the risk of a fiscal crisis if agreement is not reached on reducing the budget deficit and addressing the long-term fiscal challenges associated with rising health care costs, an aging population and a narrow and volatile tax base."

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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Wednesday, 11 Jul 2012 07:48 AM
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