13 Sep 2010

Are fears of a double dip recession justified?

NAB chief economist, Alan Oster delivered a resounding “no” when asked if he believes that the world is in for a double dip recession.

Broadly Oster sees China, India and other East Asian economies driving the global recovery and therefore declared a double dip unlikely.

The OECD (Organisation for Economic Cooperation and Development) agrees.

A recent OECD report says that while global economic recovery is slowing faster than expected and suggests that extra stimulus from governments may be needed, another recession remains an “unlikely” scenario.

In its latest economic assessment report the OECD cut its growth forecasts for the second half of the year and stated that growth in the Group of Seven industrialized countries could slow to an annual rate of 1.5 per cent in the second half of the year.

The report noted: “Recent high-frequency indicators point to a slowdown in the pace of recovery of the world economy that is somewhat more pronounced than previously anticipated.”

Australian Associated Press (AAP) quotes Treasurer Wayne Swan warning that the OECD assessment showed recovery would be an ongoing challenge, but adding that Australia had fared well through the economic crisis.

Swan said the interim assessment was a reminder of the ongoing challenges facing the global economy and added that while other economies struggled to maintain momentum Australia continued to be the envy of the developed world.

In a statement Swan said: “the OECD report highlights the strength of Australia’s public finances, confirming that Australia has the lowest gross government debt of any reported OECD country”.

This week Australia’s jobless rate fell to 5.1 per cent – 0.2 points lower than in July and lower than the major advanced economies and about half the level seen in the US and Europe.

“The OECD report today also highlights the strength of Australia’s public finances, confirming that Australia has the lowest gross government debt of any reported OECD country,” said Swan.

The deputy governor of the Reserve Bank, Guy Debelle isn’t so sure that a double dip is off the agenda.

In an address on global risk and uncertainty, which began with a quote from late rock star Jim Morrison from the Doors in the song ‘Roadhouse Blues’: “The future’s uncertain and the end is always near”, Debelle warned that a global double dip recession is a genuine risk.

Debelle’s comments reflect statements by US Federal Reserve Chairman Ben Bernanke that the Federal Reserve board is considering “further unconventional policy measures” to boost the US economy and bolster the country’s significantly slower than anticipated economic recovery.

For months Bernanke has been ruling out the chance of a double dip recession but he has now pledged that the Fed will intervene and purchase bonds if the economy appears to be sliding backwards.

The Washington Times reported that at its last meeting in August, the Fed got markets moving when it decided to reinvest mortgage securities which are coming due in its $2 trillion portfolio, distributing the cash in an array of Treasury securities. This apparently small gesture will pump between $14 billion and $25 billion a month into the world’s largest securities market – just a drop in the bucket, considering the trillions of dollars of turnover there each day.

Oster maintains that Bernanke didn’t actually say that the US is going into recession. “What Bernanke said is that economic growth is disappointing,” he said.

“Normally when an economy goes backwards the degree it has in the US it normally bounces big time. This is not happening. There was a bit of bounce thanks to the stimulus but now it’s petering out.

“Clearly the economy is growing (a 1.6 percent annual rate in the second quarter, less than previously calculated). The bad news is that unemployment is also on the rise.”

Oster admits that the US economy is in trouble and is in for a long hard slog, however he does not see a double dip.

The only issue that concerns him is Europe’s sovereign debt crisis.

“I feel nervous about this one,” he said. “Economies are still down, unemployment is very high and there are a lot of fiscal deficits out there.”

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