June 24, 2012 6:45 pm
World economy caught in ‘vicious cycle’
The global economy is experiencing a “vicious cycle” in which the efforts of governments, households, businesses and the financial sector to reduce their debts are worsening each others’ prospects, the Bank for International Settlements has warned.
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Stephen Cecchetti, chief economist of the BIS – often referred to as the bank for central banks – said that five years after the financial crisis engulfed the global economy the world appears no closer to finding a sustainable economic model.
Not until regulators get to grips with the global banking system’s woes by forcing banks to recognise their losses, take write-offs and raise new capital can the path to sustainable growth begin, he said.
“The re-vitalisation of the banks and the moderation of the financial industry will end this destructive interaction with the other sectors and clear the way for the next steps – fiscal consolidation and the deleveraging of the private, non-financial sector,” Mr Cecchetti said, unveiling the bank’s 2012 annual report. “Only then can we return to a balanced growth path.”
The report underscores the challenges facing governments, particularly in advanced economies, as they struggle to contain spending and recoup revenue lost as output collapses.
Indeed, the study says that the budgets of most advanced economies, excluding interest payments, “would need 20 consecutive years of surpluses exceeding 2 per cent of of gross domestic product – starting now – just to bring the debt-to-GDP ratio back to its pre-crisis level”.
Moreover, monetary policy has been bearing the brunt of efforts to adjust – measures that cannot go on forever and which carry their own risks as economies become dependent on ultra-low interest rates, the BIS says.
“There are very clear limits to what central banks can do,” Mr Cecchetti said, summing up the annual report. “They cannot repair balance sheets. They cannot increase productivity. And they cannot put policy on a sustainable path.”
Every additional year that policymakers fail to get to grips with long-term fiscal consolidation makes the recovery period even longer, he warned.
While the risks are greatest for developed economies – and for Europe in particular – the BIS notes that risks are rising for emerging market economies, particularly those that have experienced very rapid growth through exports to more industrialised neighbours.
“Countries such as Russia or India could experience considerable headwinds if growth slows as expected in their trading partners during 2011-15,” the report notes.
Thailand, where exports account for more than 60 per cent of GDP, sees one-fifth of all exports go to countries where growth over the next three years will be at least 2 percentage points slower than in the pre-crisis years.
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Copyright The Financial Times Limited 2012
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