Many of us expected the U.S. economy in the second half of 2010 to surpass its performance in the first half of this year. We even expected 2011 to be an expansion period. But the economy made a bad turn in the second half. Instead of expecting an economic growth of between 3 and 3.25 percent in the second half, now we will be lucky if the economy achieves a 2 percent growth. What caused the bad turn? The sovereign debt crisis has created uncertainty and impaired investment, led to appreciation of the dollar against the euro and affected U.S. exports. The housing sector is now suffering from a double dip recession. All this happened while the job market did not take any strides forward. But the inherent reason for the bad turn is the nature of global financial crises which become well entrenched after happening, and can last for a decade. Japan’s Lost Decade is still a living proof.
World-wide austerity programs will make a bad turn worse. When all major economies pursue austerity program together, then from where will growth come? Europe is now facing the threat of recession by the end of this year. Japan’s economy growth is slowing and may turn into a recession as well. China has kept the aging Japan growing. But with all the austerity programs going on at the same time, China’s 10 percent growth may turn down into 7 percent growth. This is also a good recipe for a recession in South East Asia.
There is a decoupling in the world not only in terms of performance but also in terms of economic strategy to deal with and own global problems. This is a natural part of the global transformation process that has been taking place for some time, which entails a transfer of resources from the United States, Europe and Japan to the BRIC (Brazil, Russia, India and China) countries and others in East Asia. It is possible that in 50 years the U.S. superpower stature will be very different than what it is now. But long before that happens, the U.S. dollar stature should weaken further. This is why prospective regional bloc currencies will be more important as the global dollar gets weaker. This makes it more important for prospective blocs such as the Gulf Cooperation Council countries to have a common currency that becomes more flexible over time – but flexibility should be gradual.
I did single out China out of the BRIC group. But what applies to China should apply to other BRIC members. If China’s growth prospect slows down to 7 percent or less from 10 percent or more, India should not expect a growth higher than 5 percent when Europe, Japan and the United States suffer from a recession or a technical recession. The BRIC is not a bloc and do not have economic integration among themselves to prosper on their own stand. They have good resources, improving technologies and large domestic markets. But their domestic demand does not yet lead to strong sustainable growth. They still have to swim with the big old guys: Europe, Japan and the United States. They still depend on exports as a major driver of growth. The world will be affected, but by different proportions.
What to do? While it’s okay for Greece, Portugal and Spain to pursue an austerity program, it is not prudent for Germany, Japan and the U.S. to follow suit. It is a bad policy for the United States to keep pounding on China’s growth and exchange rate policy when the whole world is trying to achieve steady growth. The world’s economies still need more stimuli to rise from this protracted financial crisis. Simultaneous austerity programs at the global level are the wrong policy at this time. All will fall down together.
The far-sighted stock market has seen this bleak economic picture from a long distance. It has been struggling since May. Commodity markets are not that far sighted and they seem to depend on the stock market to see the way ahead. They should soon see more of the bleak picture and follow the stock market more closely. But every rule has its exception, and this time the exception is gold, which will play more and more of its role as the safe haven asset during crises. It is playing the role of a safe haven more than a hedge against inflation or dollar devaluation.
What to do now? Of course gold is still a valuable asset, so are risk-free and recession-proof assets.
Shawkat Hammoudeh is a professor of economics – thetriangle.org
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