Bad news: world is sliding into a new recession

Many rich countries have struggled for three years to emerge fully from the Great Recession of 2008-09. Alas, the world is slipping into a new recession. No global authority has dared say so, but the writing is on the wall.

A classic lead indicator of a global recession is a crash in commodity prices, which is evident today. Brent crude, the benchmark variety that determines Gulf oil prices for India, has fallen from $125/barrel in January to barely $ 90/barrel. Major global commodity indices have slumped over 20%. Mittal and Tata are closing some global steel plants because of falling demand. Prices of non-ferrous metals, cotton, coal and iron ore have crashed.

This reflects decelerating or falling GDP growth across the globe, and growing realization that conditions will remain depressed for some time. Europe has long been a troubled zone, but the US economy is stalling while ominous negative signs emanate from China. The Eurozone was predicted to have a mild recession starting October 2011 and ending by the summer of 2012. The region slid down in the October-December quarter and then, thanks to a good German performance, stabilized in the January-March quarter. But the latest data show European growth plummeting in the April-June quarter, with even German factories suffering the sharpest contraction since June 2009. The UK, which is outside the Eurozone, is deeply in double-dip recession.

Optimists think that even if rich countries get into trouble, the strength and resilience of fast-growing emerging markets — above all China — will stem the rot. Alas, China is slowing down too. The HSBC Purchasing Managers’ Index shows that Chinese manufacturing has actually fallen in May and June.

China’s slowdown has hit Japan, which depends on exports to that destination. Japan is now running trade deficits month after the month, for the first time in decades. This is a game-changer.

The global fall in commodity prices has sent shock waves through all countries that prospered by riding the commodity boom, including Brazil and Russia. India, a net commodity importer, should gain from falling prices. Yet its GDP growth has plummeted too.

There is a standard remedy for recessions. Governments cut interest rates, provide easy money, and run large fiscal deficits to revive demand. Alas, these strategies have very limited scope today because the world is already replete with loose monetary and fiscal policies thanks to attempts to regain momentum after the 2008-09 Great Recession. Interest rates are at or below 1% in Europe, Japan and the US. The US Federal Reserve and European Central Bank (ECB) have injected trillions of dollars and euros respectively into their regions, breaking all records in easy money.

Recent elections have brought to power parties in France and Greece saying there is too much austerity, so the region must aim for growth too. The IMF and several economists across the world echo this sentiment. Yet the claim of excessive austerity has been debunked by Josef Joffe in the Financial Times. The ECB Bank has injected trillions of euros into the region, including ultra-cheap money to banks, massive contributions to rescue funds, and large-scale purchases of government bonds.

In 2011, fiscal deficits as a proportion of GDP were 13% in Ireland, 9% in Greece, 8.5% in Spain, and 4% in Portugal and Italy. Even France and Holland, supposedly non-crisis countries, had fiscal deficits of 5%. The Maastricht Treaty forbade anything over 3%. When Maastricht rules are so massively violated, is the problem really excessive austerity? No, the real problem is the structural madness of creating the Eurozone, a monetary union without a political union.

This fundamental blunder remains intact with no prospect of early resolution. A Eurozone break-up would cause massive chaos and misery for a year or two, after which economies would pick up. Trying to save the Eurozone will mitigate immediate misery, but ensure that it continues for years till it becomes politically intolerable.

Europeans refuse to confront the dilemma squarely. Instead, they are devising quick-fixes for the immediate problems of Eurozone banks and governments. Germany may approve some growth measures, and relax objections to direct ECB lifelines to stricken banks and debt-ridden governments. This can put off the day of reckoning, but cannot cure the underlying disease of an ill-conceived monetary union.

Many analysts (including me) have said that India’s GDP growth slump to 5.3% in the January-March quarter cannot be blamed on the Eurozone crisis alone, and reflects paralysis and bad policy at home. This will now be compounded by a new global slump. We can hardly expect any miraculous action from the moribund UPA government. We need a fresh election and fresh government.