News Analysis: For global recovery, a laundry list of risks (2)

08:53, October 09, 2010      

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Perhaps the greatest threat to recovery in the long run, according to some economists, is growing populist sentiment against international trade, which is on the rise in the United States.

"This issue seems to be unraveling quickly. And we know from history that protectionism shrinks the economy and does not increase the economy," Swonk said.

"We got ourselves into this mess together, and the only way out of it is to coordinate policies across borders and instead we are all starting to throw stones and we all live in glass houses," she said.

Ralph C. Bryant, senior fellow at the Brookings Institution, said such feelings are worrying.

"It's very easy to look at foreigners and say 'you're preventing us from exporting' and there have been times in history when it has had adverse effects," he said.


Still, the fundamental question at the heart of the global economic recovery remains unanswered: where is demand going to come from?

Ben Carliner, director of research at the Economic Strategy Institute, said the global economy has not yet adjusted to a decrease in demand from the developed world.

The continuing efforts in the United States and Europe to recover from systemic financial crises have left consumers, banks and public sectors struggling to improve their balance sheets, he said.

As these efforts depress aggregate demand, easy monetary policies, in the form of low nominal interest rates and in some cases quantitative easing, are and will continue to be used to offset the demand shock, he said.

For emerging economies that depend on exports of manufactured goods, the principal challenge is how to respond to this external shock, as foreign demand for emerging world exports has dried up, he said.


In spite of the many risks that could derail a recovery, there may be some good news on the horizon, some economists said.

The countries that did not experience the drastic slowdown via housing will most likely be able to perform much better, said Andy Busch, a global currency and public policy strategist at BMO Capital Markets.

While unemployment is high in the United States, a new congress will be voted in November, and could move to settle down some of the uncertainties for small business, which some economists say are unable to make hiring decisions because they do not know what legislation will come out of Washington next.

"That will lead to faster growth than many people are anticipating right now," he said. Still, not all economists agree with that assessment, and some observers predict that Congress will continue to be deadlocked along party lines after the elections.

Source: Xinhua
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