Coping with the world economic crisis

Britain ’s Bank of England says that the Queen’s Diamond Jubilee celebrations this year are likely to cost the economy a drop of up to 0.5 percent in output. This would make a significant contribution to lowering of the country’s economic growth rate in what is already a recession.

Britain’s Office for National Statistics has given its preliminary estimate for Gross Domestic Product (GDP) for the first quarter of this year, showing it declining by 0.3 percent - following a 0.4 percent drop in the last quarter of 2011. This means the country is in a ‘double dip’ recession; the previous dip being in 2008-2009.

The rest of the world seems to be heading in the same direction. While the United States National Bureau of Economic Research announced that the Great Recession, which began in December 2007, ended in June 2009, it has continued to effect the world economy, which now appears to be going into another downturn.

The International Monetary Fund (IMF) has reduced its world economic growth forecast for this year to 3.5 percent, the lowest since the negative growth in 2009. Some economists predict that growth this year could be over 1/3 lower than the IMF estimate.

The US economy, the World’s biggest, has started to struggle again: for the third consecutive year, it has failed, in the second half of each year, to maintain the momentum it generated in the first half. Over a third of the countries in the Eurozone currency union are in recession. The European economic growth engines, France and Germany, have slowed down.

World economy

And, worst of all, the economies of the former stars of the economic growth league, China, India and Brazil, have slowed down. China’s growth in the second quarter of this year was the lowest since 2009 and marked the eight consecutive quarter in which it slowed down, the longest period of deceleration since 1992. Brazil’s growth this year is expected to be a mere 1.2 percent.

This means that, while these countries were able to help jump-start the world economy after the first crash, this time they may not be in a position to do so. This could mean that the second drop might have an even greater impact than the first.

The effects of this second fall - which makes this economic crisis (like the Great Depression) a ‘Double Dip’ one - are likely to be felt until 1920. The current world economic crisis might end up being the longest on record, surpassing even the Great Depression of 1929-1940.

The Bank of England forecasts that British output will remain below pre-crisis levels until 2014. This view was mirrored by professional services firm Ernst and Young, which estimated that Britain’s consumer spending in Britain will not recover for another three years and that it will not rise to pre-2008 rates until after 2020. However, this latter forecast was made before the latest economic crunch was announced, so the effects could perhaps last even longer.

In the US, consumer retail spending declined for the third month in a row in June. Consumers in the European Union also spent less in the first quarter of this year. This reflects the high levels of unemployment, which has the subsidiary effect of making consumers more wary and tending to concentrate on paying off debt. US unemployment has remained above 8 percent for 3 ½ years, at recession level. Unemployment in the Eurozone is worse, at over 11 percent.

European countries

The reason for the continued low levels of consumer spending and high levels of unemployment has to do with globalisation. The growth in spending after the first dip of the current recession was directed at goods made in the poorer counties, especially China and India. Hence, new jobs were not created in manufacturing in the metropolitan countries and unemployment remained high.

Consequently, even the largely self-driven economy of the US has begun to be affected, with an amazingly high 43 percent of economic growth being accounted for by the country’s exports. And now Europe is buying less from America, which is putting pressure on US exports and hence on US growth.

Globalisation is also turning round to bite the previous winners. The slowdown and consequent drop in consumer spending in Europe, is impacting China severely. European countries buy 17 percent of China’s exports, which have fallen. Exports to Germany dropped by almost 4 percent over last year; to France they fell by 5 percent.

This has reduced production in China’s factories, but is causing a disproportionate impact on the export-oriented industries of its free-trade zones, which have powered most of the economy’s rapid growth.

Tourism promotion

China ’s economic problems are causing knock-on effects on other countries. For example, Australia has been experiencing a boom amidst the world recession because it has been exporting primary minerals such as iron ore, bauxite and coal to China. Brazil, the world’s eighth largest economy, has been exporting such diverse materials as iron ore and soya beans to China. Economists fear that Australia could suffer as a result of China’s slowdown, as Brazil already has (compounding the problems it already experience with the fall of sales to Europe).

In this context, it is necessary for such a small player as Sri Lanka to be circumspect. The USA is the single largest buyer of Sri Lanka’s goods, buying of our exports - with garments accounting for 75 percent. However, the USA is currently vulnerable, and consumer spending might decline.

On the other hand, we export almost nothing (apart from Cinnamon to Mexico) to Latin America and, almost paradoxically, while exports to the US grew by 30 percent in the first quarter of this year, exports to India have fallen 9 percent so far.

Sri Lanka has to make a conscious effort to shift the locus of its exports, its labour migration and its tourism promotion to countries which are least likely to be affected by the ongoing economic slowdown. Otherwise we ourselves will become victims of the globalised crisis.