Nurturing world economy’s growth spark requires patience

Shoppers are reflected in a shop window as they walk along Oxford Street on the last Saturday before Christmas. REUTERS/Luke MacGregor

Despite efforts to prevent the world economy, particularly those of developed countries, from slipping into another great depression, the recovery has been disappointing.

A report by America’s Congressional Budget Office late last year showed that the United States economic growth rate has been 9 per cent below what was seen in past recoveries, on average, in its first three years. This means that the US economy is suffering from a gigantic cyclical gap.

Similarly, the economic performances of the euro zone and Britain have shown identical weak growth until the end of last year.

Moreover, the growth rate in emerging economies, such as China and India, is slowing. These emerging economies together with developing countries account for about half of global GDP.

However, at the beginning of this year the world economy has shown some promising signs, which indicate that economic activity is strengthening in advanced economies.

In the US, the recovery is gaining ground because of the improvement in the financial environment.

In the euro zone, indicators show it is slowly climbing out of recession; surveys of economic activity registered the first expansion in 18 months since 2011. This was a sign that the euro zone pulled out of its recession by the end of last summer.

Moreover, the British economy expanded by 0.6 per cent during the second quarter, the second-largest quarterly increase since the end of 2011.

However, the economic crisis of 2008 has confirmed the cross-border contagion among the countries. The crisis also underlined the need for a coordination system.

The IMF plays a key role in this regard. Recently, the IMF has developed a macro-prudential policy in order to protect countries’ financial system and to develop essential crisis-prevention tools.

The macro-prudential policy requires the ability to evaluate risks to the financial system as a whole, collect and organise the right tools to reduce such risk, adjust the scope of financial regulations, and close data and information gaps. Besides, it requires strong institutions to manage the policies, in other words an enthusiastic macro-prudential authority.

The world economy agenda which was established last October by the IMF can be described as follows: It seeks to implement ambitious policy actions to achieve sustained strong and balanced growth with financial stability. Moreover, the agenda will decisively accelerate the speed of structural reforms and address high fiscal deficits and public debt. The preferred policies are varying from one country to another, depending on the country’s circumstances.

In the advanced economies, macroeconomic policies are needed to remain supportive until the recovery is strong. Also, persistent improvement on financial, fiscal and structural reforms will be essential to secure economic growth.

In the US, economic policy needs to carefully manage the stabilisation of the financial environment, and raising the debt ceiling quickly, when needed, to prevent a government shutdown.

In the euro zone, the aggregate demand should be supported by either conventional or unconventional monetary policy. In addition, monetary policy should prevent any escalation of financial destruction. Besides, more engagements are required to mitigate risks from the relationship between high levels of private-sector debt and weakened bank balance sheets.

In Japan, significant actions to continue stimulating economic growth are needed.

In emerging economies, policymakers should carry out aggregate demand support policies. Also, these policies should be balanced with activities to address different economic issues such as building credit and sustainability risks; higher capital flow volatility; and slowing potential growth. On the structural side of the emerging economies, policymakers should highlight structural difficulties to ease supply-side constraints and boost productivity growth, particularly in non-tradable goods and services. Moreover, reforms need to concentrate on accelerating infrastructure investment, creating a more open trade and investment regime, deepening financial markets, and reducing labour market rigidities.

Most low-income countries have achieved solid economic growth in recent years, supported by strong domestic demand and generally favourable commodity prices. The main challenges are the new external shocks, particularly if commodity prices were to be hit hard. As such, stronger fiscal and foreign reserve positions can provide buffers to these countries.

In Arab countries, economic growth and new investment opportunities are influenced negatively with the political uncertainty and security concerns. Hence, maintaining macroeconomic stability and meeting social aspirations without reducing growth is the key challenge. However, the scope for action will remain constrained by political developments and the security conditions.

Overall, this year had some encouraging signs for the world’s economic growth, particularly in advanced economies. However, this small spark needs to be given more attention to become bigger and to distribute its warmth everywhere.

So the world economy still needs different types of policies and actions to jump to a new promising era. These policies and procedures have many challenges, but we should be patient and keep working.

Osama Sweidan is an associate professor of economics at United Arab Emirates University