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Global economy will not suffer another deep recession

By Zhou Xiaoyuan (People's Daily Overseas Edition)

16:42, August 24, 2011

Edited and Translated by People's Daily Online

Several of Wall Street's top investment banks recently slashed their forecasts for U.S. and global economic growth in a concerted manner. Morgan Stanley even warned that developed countries are "hovering dangerously close to a recession." Meanwhile, a rumor arose that European banks may face funding difficulties due to the ongoing debt crisis. The negative news jointly plunged U.S. and European stock markets, which had just enjoyed stability for less than a week, into turmoil last Thursday and caused a chain reaction in the Asia-Pacific stock markets last Friday.

Continuation of global financial crisis

The U.S. and European debt crises are more of a continuation of the 2008 global financial crisis than the beginning of a new economic crisis. Ba Shusong, deputy director of the Finance Research Institute under the State Council’s Development Research Center, said that the United States and European countries ran up huge debts in the process of dealing with the 2008 financial crisis, which laid the foundation for the ongoing debt crisis. Ba added that the 2008 financial crisis was a "panic crisis" as investors did not know the duration and impact of the crisis. The current debt crisis is a "crisis caused by systemic risk factors" as investors had foreseen the massive debt burdens of the United States and certain European countries.

Zhang Xiaojing, director of the division of macroeconomics of the Institute of Economics under the Chinese Academy of Social Sciences, said that the U.S. has increased its debt from more than 2 trillion U.S. dollars to nearly 14.3 trillion U.S. dollars in less than 20 years. The sustainability of its debt-driven economic growth model is facing unprecedented challenges. At its current pace, the U.S. debt to GDP ratio will reach the present level of Greece within three years, and the United States will have to suffer severe consequences, such as soaring interest rates, a dollar crisis and hyperinflation sometime in the future.

U.S., European crises further worsen global economic situation

When the world economy was slowly recovering after emerging from the serious international financial crisis, the successive debt crises in the United States and Europe have worsened the world’s already fragile economic situation. Furthermore, the U.S. sovereign credit rating downgrade by Standard & Poor's has led to the dramatic declines in global stock and commodity markets.

The recent U.S. economic data shows that the U.S. economy that is deeply trapped in the debt crisis still lacks growth drivers. The jobless rates in more than half of U.S. states were on the continuous rise in July, and consumption and industrial production were weak. The U.S. housing market was still in the downturn and the confidence of enterprises and investors was on the continuous decline. The negative factors affecting U.S. economic growth are continuously mounting.

The European debt crisis triggered by the Greek debt crisis is rapidly spreading to other European countries that face sovereign debt issues, such as Ireland, Portugal, Italy and Spain. According to the latest economic data, the considerable declines of the economic growth in core European countries such as the United Kingdom and France have made Europe's economic recovery almost stagnate.

The constant deterioration of the U.S. and European debt crises has resulted in a deep market concern about the collective "double dip" of the developed economies. Zhang said that the current crisis is due to the problems in the U.S. economy that serves as the world’s economic center and the "engine" of world finance. The European debt crisis has even intensified the spread of the financial storm.

Hong Pingfan, director of the Global Economic Monitoring Center under the U.N. Department of Economic and Social Affairs, said that the U.S. and European debt crises have become the principal risks threatening the global economic stability and growth now and over the next several years. This will not only increase the financing costs of each state government but also gradually hurt the real economy including enterprises. What’s even worse is that they will greatly undermine the confidence of consumers and investors and lead to financial market turbulence.

Global economy will not have negative growth

While being interviewed by the reporter of the People's Daily, Mei Xinyu, a senior researcher from the Research Institute under the Ministry of Commerce, refuted the viewpoint that the global economy will decline to the bottom again. He believes that the crisis probably will prolong the depression and recovery periods for Europe and the Untied State, but is unlikely to lead to a new period of great economic declines.

Mei believes that since the worsening situations of U.S. financial and debt will last for a long period of time and the deficient political system and domestic social consciousness of the United States will make the issue even worse, international market participators' confidence in the U.S. economy and politics will obviously weaken. However, the tangible U.S. economic sector currently has better cash flows and revenues than that at the peak of the sub-prime mortgage crisis. In addition, the U.S. currency hegemony has not loosened and the emerging countries in Asia and Africa still have stable economic growth. Therefore, the depression period will be prolonged, but a global economic slide will not appear.

Zuo Xiaolei, a senior economist from China Galaxy Securities, also expressed her support for Mei’s viewpoint by using data. She said that the current economic decline and the global economic decline starting from 2008 are not at the same level. In 2008, as the Lehman Brothers went bankrupt, the whole U.S. financial system was almost paralyzed. In the first half of 2009, the major economies of the world experienced a great economic depression, the United Kingdom declined by 9.8 percent, the United States declined by 6.8 percent and Germany declined by 5.6 percent.

Zuo believes that, regarding the current economic situations, developed economies have a slow average economic growth of about 2 percent, and the debt crisis further indicates that a strong force with the potential to drive future economic growth still has not appeared. Due to the financial deficit of each country and the global debt crisis, the policies cannot play a positive role in promoting economic growth and recovering confidence, and they will further restrain economic growth.


Leave your comment2 comments

  1. Name

the truth at 2011-08-2646.64.43.*
$10000000000000000000000000000000000000000000 it's a fixed depression
ari.gon at 2011-08-25192.251.226.*
Yes and no. The world"s econmy will not go into recession but the U.S. and Europe"s will. China, Brazil, India, Russia and South Africa and the rest of the world will not. The BRICs will be the main engine for the world"s economy. It is wrong to think that if the U.S. and Europe goes into recession, the rest of the world will. Recession is just a corrective downturn cycle that every economy must undergo. Even China. The world is not the U.S. and Europe. So, get this in perspective. However, if every country on this planet is on the same cycle phase, then God forbit, the world will crash at the same time and turn up at the same time. A scenario that is at once alarming and joyous depending when the peak and trough is reached. But luckily it is not like this. Excpect China and the rest of the BRICS to soften or hedge against the U.S> and EU downturns.

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