Recession looming

The global economy is at a tipping point. Despite serious efforts made by policy makers, the worlds largest economic bloc is threatened by a financial crisis. The global economy is expected to grow at 2.5 and 3.1 percent in 2012 and 2013, respectively, compared to 3.6 percent forecasted in June for both years. The growth rate for developing countries has been revised down to 5.4 and 6 percent in 2012 and 2013, compared to 6.2 and 6.3, forecasted in June. Diminishing growth forecasts reflect the fragility of the global economy. The Global Economic Prospects report released by the World Bank states that the possibility of further escalation of crisis in Europe cannot be ruled out. The report talks about the increased uncertainty and vulnerability, and its effects on the global economy. It further states that the uncertainty regarding high income countries fiscal stability is slowing world growth. Secondly, the uncertainty about the policy makers ability to restore market confidence in the long term is also putting pressure on global economic growth. The decline in yields of short-term sovereign debt of Italy and Spain, and almost no change in long-term yields reflect the perception of long uncertainty regarding fiscal stability of the region. Another indicator that the uncertainty prevails is the high rate of Credit Default Swaps (CDS) of countries like France. Developing countries are most vulnerable as they might not be able to finance their deficits in case the global financial markets freeze. An important element that provided a cushion to the developing countries in 2008/09 was external financing through World Bank and IMF. The report states that due to lack of fiscal resources in high income countries the counter cyclical policy response- like that taken in 2008/09- would not be possible. And therefore the recession can be much longer than the previous one. So as a contingency plan, countries like Pakistan who have high deficits should pre-finance, so that at the worst times they do not have to make abrupt cuts in government spending. In addition, infrastructure programmes should be made in case a further stimulus is needed to spur the economy.