World economy might face a dip in recession

A PREMATURE withdrawal of fiscal stimulus globally could cause a double-dip recession, with the slowdown among developing economies then likely to be even more severe, according to a pre-release of a key global economic report yesterday.

A PREMATURE withdrawal of fiscal stimulus globally could cause a double-dip recession, with the slowdown among developing economies then likely to be even more severe, according to a pre-release of a key global economic report yesterday.

Contributor to the latest UN World Economic Situation and Prospects Report 2010, Professor Charlotte du Toit, cautioned in South Africa that while premature withdrawal of the stimulus was a downside risk for the global economy, a "business-as-usual" response would also lead to a widening of global imbalances and the risk for a hard landing for the US dollar.

"A sustainable re-balancing of the global economy requires further international cooperation."

She noted that an incorrect or ill-timed response would have long-lasting impacts on poverty alleviation and human development on the back of weak social safety nets. Sixty developing countries will see declining incomes in 2009.

Another point made is that the recovery is due to be led by developing Asia rather than the developed world. She said the G-20 needed to be successful in sustainable re-balancing in order to avoid the prospect of a double dip.

The analyst said that a too early withdrawal of the economic stimulus would lead to another global growth dip and usher in a "real recession". Growth in this scenario will follow the 2,2percent of 2009 to another negative print of between 1 to 2percent. At the moment, the UN is projecting average global growth of 2,4percent in 2010.

"The recovery will then also be way below potential," Du Toit said.

Du Toit pointed out that the 2,4percent was 7percent below the baseline if the projected pre-crisis economic growth had continued.

A "business-as-usual" response would not lead to the double-dip recession, but would see a contraction in the rate of growth and then only a slight recovery.

Du Toit said as the impact would be even more severe for developing economies, it must be factored in that there were different policy challenges across these economies, and mainly structural constraints impeding sustained economic growth.

She said that a good time to withdraw stimulus would be when the recovery was robust, hinged to consumption and private investment, and supplemented by some significant employment growth. - I-Net Bridge

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