Morrison

If we were to go by the economic picture being painted by billionaire investor Warren Buffett, one of the world's richest men, things are likely to get worse before the United States (US) economy begins to recover. That time, he believes, is still far off because there were "a lot of excesses to be wrung out and that process is still under way, and it looks to me that it will be under way for quite awhile". The World Bank, too, is, according to its head, Robert B. Zoellick, indicating that while ".. growth is expected to revive during the course of 2010, the pace of the recovery is uncertain".

The bank's forecast for world gross domestic product in 2009 has actually been revised twice this year already. From an original estimate made late last year of negative growth of less than 1.0 per cent, the forecast was, in April, adjusted to a decline of 1.7 per cent and has now been further adjusted to negative growth of 3.0 per cent. And the bank has warned that developing countries in particular will face bleak prospects unless the fallout in their exports, remittances and foreign-direct investment is reversed by 2010. Worryingly, it predicts that "the poor in developing countries will continue to be buffeted by the aftershocks".

Other voices, including members of the Obama economic team, and Ben Bernanke, US Federal Reserve chairman, are sounding more optimistic. They point to significant upward movement in stock markets since March, easing of the credit freeze, and improvement in the finances of leading American banks as the first 'green shoots' of recovery. Increases in consumer spending in April and May, the strongest showing in nearly two years, as well as lower monthly job losses for these same months are also being regarded as signs that the US economy is stabilising.

The consensus, however, is that the US unemployment rate, which now stands at 9.4 per cent, the highest in decades, will continue to rise, and is very likely to climb above 10 per cent. With Americans uncertain about the job market, recent gains in consumer demand could be temporary. That is why the US Federal Reserve is maintaining its relaxed monetary policy and is continuing to flood the financial system with liquidity, as it seeks to unblock credit markets.

In recent days, Europeans have also become concerned at the prospect of a slower-than-expected pace of recovery in their economies. Thus, in a change of course, the European Central Bank, - which had resisted the extra-low interest-rate policies pursued by the Federal Reserve, the Bank of England and the Bank of Japan - last Wednesday made its largest-ever loan allotment to the financial system. The loans of more than US$620 billion that have been extended at a fixed rate of one per cent are meant to help thaw lending in the 16-nation Eurozone economy.

developing countries

In spite of this move and the pump-priming by the Federal Reserve, the balance of opinion among leading economists is that Europe, the USA and Japan will lag behind China, India and Brazil in recovering. These developing countries, which along with Russia are often referred to as the 'BRICs', are being looked at as a locomotive to help pull the world economy out of the doldrums. This view is a revival of what has recently been thought of as the discredited decoupling theory, which held that the BRICs and other emerging economies had the critical mass and development dynamic to propel rapid growth independent of the developed economies.

Those giving renewed prominence to this theory include the secretary general of the rich-country group, the Organisation for Economic Cooperation and Development. In its most recent report, the group is forecasting that China, the largest of the BRICs and now ranked as the world's third-biggest economy, will register growth of 7.7 per cent this year, and 9.3 per cent in 2010. India is projected to grow by 5.9 per cent in 2009 and 7.2 per cent next year, while the growth rate of the Brazilian economy is expected to speed up to four per cent next year after a sharp slowdown this year. Russia, the other leg of the BRICs, is, however, facing a long recession, being one of the countries most severely hit by the global financial meltdown.

export-driven growth

China's economic success continues to marvel even those who observe it most closely. After an explosion of export-driven growth and a tidal-wave investment boom, the Chinese economy has begun to switch to domestic-driven production at record pace. This production is being propelled by investment spending in housing, factories, roads, railroads and other physical infrastructure, and increased by an unbelievable 50 per cent in the year ending May 2009. The stimulus spending by the government is also boosting consumer demand, which grew by 15.2 per cent in May, even as consumers in the developed economies have been cutting back.

The danger for energy-deficient, developing countries like Jamaica is that as oil demand has started to shift ever so slightly, prices have risen. It was only as recently as that oil prices were in the US$30 range, but now have more than doubled to around US$70 per barrel as China's increased purchases and a softening US dollar have been exerting upward pressure in the international oil markets.

Testing times are ahead, but Jamaica, too, can mould an investment-driven recovery if we can pull together. But there has to be bold thinking about how the country's savings are deployed strategically to position the economy for growth in the changed landscape that will emerge after the recession.

Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.