Zhang Monan

Financial crisis far from over

By Zhang Monan (China Daily)
Updated: 2010-09-24 08:08

Long-term global recovery still a distant dream; countries have to brace up for a second recession before things really improve

The world economy has seen a nascent recovery spearheaded by some emerging markets since the third quarter of 2009, but the world is still to see sustainable economic growth even two years after the global financial crisis broke out. The sluggish global economic recovery shows that the impact of the worst crisis since the Great Depression is far from over.

At the height of the crisis, many countries took unprecedented measures to check recession and stimulate economic growth. But almost all of those measures turned out to be temporary and, hence, failed to become a long-term and intrinsic factor facilitating sustainable economic growth.

As the stimulus packages announced by the countries neared their end, short-term and rapid global recovery reached its peak in the first and second quarters of this year. The world economy is thus likely to be on a downward trend again, facing the pressure of cyclical fluctuations.

In August, the growth of new global orders fell to a year's low. Inadequate demand in the global market has made enterprises less eager to expand their production capacities and stocks. In terms of global capital investment, the United States has just entered a new period of fixed assets investment, raising its capital investment in the short term. Fixed assets investment in the world's largest economy registered a higher growth rate in the second quarter this year than the first.

Like some emerging markets, including China, developed countries have not been able to escape the periodic real estate boom. Since the global financial crisis broke out, real estate bubbles, epitomized by the one in the US, have entered a long state of adjustment. With the end of the stimulant tax rebate policy for buying homes in the US, the country's property market has begun slumping once gain.

Official figures show home sales in the US, which account for more than 80 percent of its real estate sales in terms of value, fell 27.2 percent in July from the previous month, the greatest decline rate since 1968. And the sale of new homes in July dropped 12.4 percent from June, the lowest since 1963.

According to the Organization of Economic Cooperation and Development (OECD), the real estate development cycle in the US on average is about 18.3 years. The period from 1995, when the US' real estate sector hit bottom, to 2006, when its realty bubble burst, is of 12 years. So according to the OECD's analysis, the recession in the US' real estate sector should last at least until 2012.

Compared with the $6-trillion contraction in home values in the US, the European real estate market has not suffered a huge loss. But it still faces inadequate demand. Statistics show the real estate output in euro-zone countries suffered a 3.1 percent decline in July from the previous month. All these indicate that the real estate markets in developed countries are still in a comparatively long period of recession.

In addition, the global financial crisis is likely to cause some long-term harm to potential global output and demand. In terms of GDP, the world's potential economic growth before the crisis would have been 3 percent year-on-year. It declined to 2.1 percent in early 2009 and rose only to 2.6 percent in recent months, still 0.4 percentage points less than the pre-crisis days. Despite its recent increase the rate of manufacturing capacity utilization in the US, European countries and Japan is still lower than its average in a long period.

As the world's largest economy, the US should play an important role in global economic recovery but it is now plagued by an enormous household debt because of over-spending for a long time. The financial market in Europe is in an extremely precarious position, too, and Japan is under structural deflation pressure. All these add up to a combined shortfall of about $1 trillion in demand in the three developed markets.

Therefore, China's comparatively robust domestic demand has become the main force driving global economic recovery. But growing domestic consumption in China is not enough to offset the serious fall in consumption in the US. According to statistics, the US' individual consumption value before the crisis was $10 trillion, about six to seven times that of China's household consumption.

Economic indices indicate that the global economy will find it difficult to return to the road of rapid growth in the near future, and the latest round of economic adjustments is expected to last another two to three years. Economies across the world have to work out another round of stimulus packages to tackle a possible second economic recession. But even if they do so, it would take a long time for the global economy to emerge out of the crisis. So, all the countries have to brace up for this situation before new economic growth points are created.

The author is a research scholar in economics with the State Information Center.

(China Daily 09/24/2010 page4)