The Hindu Business Line : The West in recession

One year after America suspected its economy was sliding into recession, the National Bureau of Economic Research (NBER), charged with mapping economic growth, announced on Monday that the country has been in recession since December 2007. That official prognosis was predictably greeted with dismay by the Dow Jones index and stocks fell sharply. The NBER’s announcement now means the world’s leading economy has joined the rest of the advanced countries — the 15-member Eurozone, Britain and Japan — at the bottom of the economic cycle. What does that mean for the rest of the world?

Since the direct impact will be felt on world trade, the the emerging economies will also be pulled along into the downturn. World trade had already begun to slow down with the World Trade Organisation (WTO) in late November predicting a fall in growth to 4.5 per cent this year from 5.5 per cent last year and 8.5 per cent in 2006. The WTO estimates assumed emerging markets would offset declining output in advanced countries but with recession now official the WTO estimate of 4.5 per cent may appear optimistic. Export-dependent emerging economies and China will be hit the most. India will also feel the impact even though exports are not the mainstay of GDP growth; export data for October already represented the first negative growth in seven years. Policymakers should keep in mind the news from the US while reviewing the monthly data; in all likelihood, the coming months could be worse as the US economy adjusts to the demand compression that could continue well into the next year. Some Asian countries have begun actively promoting their domestic economies, the most notable being China that announced a $586 billion fiscal stimulus package for infrastructure and social sector spending. It is also actively promoting free trade agreements with some Latin American countries. India by contrast has yet to respond with the long term in mind. So far policy has been par for the course; exporter-driven incentives that worked when markets slipped temporarily due to currency fluctuations.

This time around, policymakers and exporters will have to get real if they are to cope with an absolute decline in demand that incentives will not revive. In labour-intensive exports, the projected loss of jobs has to be tackled with a programme for job retraining and skill development for employment in sectors that can withstand the recessionary period. The interregnum can also be used to make traditional exports more competitive for the time when world trade will pick up. Traditional export incentives at this stage will simply be a waste of precious resources that can be gainfully deployed elsewhere.