First year anniversary of Economic Recession:

Predictions are a dangerous thing – especially those that pertain to the future. It is with full consciousness of the unfaithful path a forecaster must walk, that will embark upon the dangerous but exciting journey of predicting the economic environment of 2010 and ahead. The recession has probably ended according to leading economists who deal only in probability study and are therefore, seldom accountable for what they said just a minute ago. But that doesn't mean it's time to break out the champagne. The return of up-trending charts may sound like good news for the economy, but it's going to be at least a couple of years before growth picks up in earnest. Figures mask chiseling activity and cannot be relied upon. There is only claim which marginally ratifies the End of Recession and that is, world economy has stopped shrinking further. But it would be the greatest lie of the current time to say that Recession is over. Improvement seen in the backdrop of new surge in unemployment, fall in industrial productions, slashed consumer spending, radical government countermeasures, historical debt burden and fiscal deficits, is a mirage on the horizon.

Whatever little economic growth noticed in recent months is due to temporary factors. The first is the effect of the inventory cycle as companies restart production lines following months of stock liquidation. The second is the fiscal stimulus, which is contributing the majority of the perceived growth. Taken together, these factors represent meager boost that will most likely diminish or disappear in due course of time in the face of continued high unemployment, budget-conscious consumers, and overcapacity in the manufacturing sector and housing market. Sharp people approve Fear of Deflation rather Inflation in the coming period. If there's more housing vacant, rents are likely to come down; if there are more unemployed workers, wages are less likely to go up; if there is more excess capacity in factories, companies are going to have a harder time raising prices .Unfortunately, there's not much that can be done about most of this overcapacity. Factories can limit production, yes, but vacant homes are already built and even people who retired early are being forced back into the workforce by market losses. ILO report said that 27 million people lost their jobs in 2009. The ILO said that there were about 212 million people out of work by the end of last year. But it expects unemployment in 2010 to stay at about the same levels, rising slightly to 213 million.

Post-Recession Fears Facing the World Economy

Price Inflation :

With unemployment continuing its remorseless rise it hardly seems credible to start fearing inflation, as discussed hereinbefore. Yet, there are some reasons to believe that the threat of inflation is just around the corner pointing out an explosion of the monetary base. The monetary base is a narrow definition of the money supply. It includes notes and coins in circulation and commercial bank reserves at the Central Bank. The monetary base is sometimes called high-powered money because a change in the monetary base can cause a large change in the money supply due to the money multiplier effect. In normal circumstances a rapid increase in the monetary base such would be inflationary. However, these are not normal circumstances. If we talk of US, the Federal Reserve is paying interest on these reserves. This encourages commercial banks to hold onto these reserves and not lend them out. The economic climate is discouraging lending. Another fear for inflation is the rise in government borrowing 'financed' by quantitative easing. Money supply increased by printing and offloading more money into economy with production remaining same, price of goods can increase to alarming levels. At the moment, there is a lot of spare capacity in the economy. Fears of Inflation, though not imminent could be a major problem in the future.

Protectionism:

Though big leaders are talking taller than the truth from Davos and other summits, they cannot help remedying their ass -burn after a limit. Protectionism is a government policy aimed at shielding a fragile economy from cheaper or better imports through imposition of high duty rates (tariff barriers), quotas, and/or inordinately stringent or time consuming inspection or quality regulations (non-tariff barriers). All countries practice protectionism in one form or another but, generally, without going to any extreme. This would jeopardize all objectives of globalization which has made deep inroads so far in world economy. Here, it would be sufficient to put forward one single argument that establishes disadvantage of Protectionism verses Free Economy efficiency. Ricardo's law of comparative advantage and Adam Smith's division of labor examples make it obvious that it is more economical to specialize in the things you do best and trade for everything else than to attempt to provide everything all by yourself. Wealth and the standard of living are enhanced by the division of labor, not by trying to do everything by you. Trade is essential to economic growth and restricting trade inhibits growth, which leads to a lower standard of living. Masses are benefited by Free Trade. Protectionist policies hit the developing economies hard. Cost of production increases sharply if productions from low-waged economies stop coming. This subject may be discussed at length at some other point of time. Here, we would take one illustration to understand the implications of the subject. China has a policy of artificially keeping the Yuan undervalued. It does this through exchange controls and purchasing large sums of dollar assets. This weak Chinese Yuan is good for Chinese exporters, but, it creates disequilibrium in the world economy. It leads to a large trade surplus for China and a deficit for the other nations it deals with, mainly U.S. The weak Yuan harms global demand, especially in the US. If the Yuan is appreciated to its natural level, Chinese consumers could buy more imports and US companies would have greater competitiveness in selling to China. This undervalued Yuan is a form of 'beggar thy neighbor' protectionism. It leads to retaliation in the form of protectionism against Chinese imports.

Weakness of Growth

Past growth was based on rising asset prices (especially housing) and a credit bubble. Neither of these is likely to return. Consumers are much more reluctant to spend, we are entering a new era of frugality with higher saving ratios. This has definite benefits but makes a recovery to normal growth more difficult.

False Dawns.

The global economy has suffered its worst years since the great depression of the 1930s. A small improvement in growth could cause a premature celebration of recovery - leading to the removal of expansionary fiscal and monetary policy which could cause a Double Dip Recession.

Budget Deficits

Steep falls in economic output has compounded structural deficits leaving many countries facing record peace-time debt levels. Already some countries like Greece have already had rating downgrades. Others like the UK and Ireland have been threatened with rating downgrades. The need to offer concrete plans to reduce borrowing makes it a difficult balancing act for maintaining economic recovery.

Financial Weakness:

Many banks and financial institutions are still nursing large losses from the credit crunch. It will take time for banks to improve their balance sheets. The prospect of further falls in house prices could still undermine banks fragile bank balance sheets. Forfeiture of Assets and Recovery of Debts are two different things.

Commodity Inflation:

Whilst the fundamental problem is still spare capacity and unemployment, evidence suggest commodity prices are already rising due to strong Chinese and Indian demand. Rising oil prices could cause a return of cost push inflation as seen at the start of 2008. This could complicate Monetary policy which is trying to boost growth.

Still a man hears what he wants to hear and disregards the rest. Leaders, Politicians, economists, analysts have a religious liability to nourish this miniscule desire of people.