A less-than-stellar recovery of the U.S. economy, the inability of the euro zone to dig out of a deep financial hole and a slowdown in emerging economies point to the need for different policy approaches to avoid another global recession.
For the world to get out of the current financial trouble, the United States first needs to switch gears. The weakness of the U.S. economy is dragging down other economies because of its sheer size. With a gross domestic product of $15 trillion and per capitaGDP of more than $48,000, the U.S. is by far the largest economy.
But more than three years after the Great Recession officially ended, the American economy continues to give mixed signals. While the job numbers announced Friday certainly were better than expected – U.S. employers added 163,000 jobs in July – a slight uptick in the unemployment rate to 8.3 percent, coupled with the slower growth rate in the second quarter clearly show that the task ahead is not easy.
Several factors are holding the United States back from making a full recovery, including a high unemployment rate, a dip in consumer spending, a dearth of business spending, and a dysfunctional U.S. Congress. Troubles in the euro zone and a slowdown in Asia are also a big factor.
In the aftermath of the recession, Washington had spent about $800 billion to bail out troubled giants to restore investors’ confidence. According to Bloomberg News, the United States has “spent, lent or committed $12.8 trillion” to battle the recession. The corporate bigwigs that were bailed out included American International Group, Citigroup and major carmakers such as General Motors and Chrysler. In the absence of bailout packages, the entire financial system would have collapsed.
But despite all that, the U.S. recovery has been anemic largely because of an unemployment rate that has stayed above 8 percent since President Barack Obama took office. That’s significantly higher than rate of around 5 percent that existed inDecember 2007 before the recession struck.
The scenario at the global level is no different. According to the International Labor Organization, global jobless claims at the beginning of this year totaled 200 million. Only four countries have a bigger population than that – China, India, the United States and Indonesia.
The ILO also says that about 80 percent of the worldwide population remains without social protection and 900 million people are struggling to stay above the poverty level by earning more than $2 a day. Another 400 million new jobs will be required in the next decade to absorb new talents.
The high jobless rate has had a depressing effect on consumers, as amply shown in Nielsen’s survey of global consumer confidence in second quarter. While consumer confidence slid three points to 91 from the first quarter, the survey also showed that the top concern for people is job security.
Discretionary spending also slipped, as more than two-thirds of spent less and saved more. One bright spot: Consumer confidence is higher than it was in 2009, during the darkest days of the recession. Back then the level had reached a rock bottom of 77 points.
With the euro zone in doldrums and the region unlikely to recover until at least 2013 due to the expanding debt crisis, the global economy needs a big boost from its third pillar, the emerging economies. But China, India, Brazil and other economies are also slowing down.
The problems in Europe and the emerging markets alone are enough to tip the global economy into a double dip recession. But there is another big factor that heightens the risk – the United States is expected to cut spending beginning next year as part of an agreement between Democrats and Republicans to raise the U.S. debt limit in the future.
Policymakers around the world are working to prevent a double dip recession by announcing various stimulus measures to spur growth. For instance, the European Central Bank has issued assurances that it will lower the borrowing costs of member countries.
While such stimuli will be helpful in the short-term, what policymakers must do is focus on the long-term, structural problems that have led to the high unemployment rate.
But one step that they must take urgently is to spur greater household spending. Keeping interest rates at record lows have not proven enough. Stronger actions are needed to restore consumers’ confidence in the job market, but policymakers must first shed their political differences and work together to make the global economy more vibrant. Otherwise, the global economy will be in jeopardy.
(Global India Newswire)