Global Trends by Martin Khor
Monday 24 November 2008
Global economic outlook darkens
hopes that the global economy will turn the corner soon were dashed
last week with more big firms in crisis, and stock markets and currencies
The global economic crisis continued its spiral last week, with bad news in both finance and the real economy.
As the bank has
extensive business in Asia, the region will experience some fall-out,
according to the Straits Times (
Another focus in the past week was the emerging crisis in the automobile industry, due to the weakening consumer demand for cars. Bosses of the three big American auto companies (General Motors, Ford and Chrysler) went to Congress to plead for a further US$25 billion loan (they already received $25 billion in aid) to stave off potential bankruptcy.
They have not succeeded so far. The US administration has drawn a line, that it will bail out important financial institutions (as failure may have systemic effects) but not crisis-stricken industrial companies.
Many Democrats have
other views, and they have lobbied for a bailout of the
The car industries
in Asia and
Meanwhile a trade dispute may be brewing over the effects of one country’s subsidies to its auto industry on the competitiveness of the motorcar firms of countries that do not subsidise.
The European Union
was reported to be considering complaining against the
Evidence of recession
continues to emerge.
of bad news caused stock markets to sharply fall for most of last week.
Asian equity markets were the most badly affected, with big losses in
Just as worrisome was the plunge in the values of several Asian currencies, especially the Korean won, Indian rupee and Indonesian rupiah, which are the most susceptible to currency attacks because of the countries’ weak trade balance.
The currencies of
The declines in several Asian stock markets and currencies signal the “flight to safety” of international investors seeking to avoid risk and shifting to the safe haven of US Treasury bills.
Hedge funds are also unwinding their positions as redemptions by their investors increase.
As a result of all
the above, there is a significant outflow of portfolio capital from
many Asian countries, including
These hopes have since been dashed as the crisis shifted from the financial sector to the “real economy” of industrial production, jobs and trade. Meanwhile the financial sector itself has not recovered.
Comparisons to the Japanese stagnation of the last two decades, and to the 1930s Great Depression are increasingly being made.
The use of monetary instruments like lowering interest rates seems to have been mainly exhausted, so the focus is shifting to “fiscal stimulus” or an expansion of government spending, as the best tool to counter the recessionary trends.
Just months ago, running a government deficit was seen as a very negative thing. But economic orthodoxy has changed almost overnight. Governments are now egging one another on to see who can spend more money.
Thus, the move by