IT MAY TAKE about four more years for the world economy to come out of the current recession, and even then some caution will exist among investors.
This is the view of Dr Fred Bergsten, director emeritus of the Peterson Institute for International Economics, who, on his visit to Barbados for the first-ever Caribbean Economic Forum at the Grande Salle, Central Bank, said the world economy was picking up this year.
“Clearly the world economy is picking up in 2014 from where it was in the last two or three years, and I think that outlook is likely to continue for the next two or three years,” he told regional broadcaster Julian Rogers and a live web and television audience.
He said not only was the pickup in most economies accelerating, especially in Japan which had been “a drag on the world economy for 20 years”, but fears that the Euro would have collapsed had essentially disappeared.
“I don’t think we have much downside risks. I think we could get some upside surprises,” said the veteran economist who founded the Washington-based Peterson Institute and has been an advisor to successive United States governments since the 1970s.
Asked whether the current crisis was comparable to other recent recessions, Bergsten said the main distinguishing feature of this one was that it was driven by financial disruption.
He explained that the typical recession over the last 50 years was characterised by inflationary surges where central banks were forced to tighten money and raise interest rates to check the inflation.
“Then the process reverses fairly quickly and you get what economists call a V-shaped recovery, even if you have a sharp turn down, you’re very likely to get a sharp resurgence. That’s been a very typical reaction and framework for global economic performance over the last 50 years.
This time was different,” he told the Grande Salle audience which included Central Bank Governor Dr Delisle Worrell, a battery of regional journalists, and members of the banking and economic fraternity.
“This crisis was driven by financial disruption starting in the United States with the sub-prime prices and the housing bust, transferring to Europe with a similar situation there, but compounded by the difficulties of the Eurozone; all this coming on top of the fact that Japan had a similar bust 20 years ago and had been stagnant for a long period.
“ . . . When the problem is caused by financial crises, it means that the private sector in all the countries involved is over-leveraged. Banks, companies, households have all over-borrowed, they’ve lived beyond their means, they’ve built up debts, their balance sheets have deteriorated.
“Once the bubble bursts, the stock markets go down, the housing markets go down, everybody’s wealth and income go down, then it’s going to take them some time to recover to a sustainable position where they feel they can once again start behaving in normal economic terms,” Bergsten explained.
Stating that history had shown it took five to ten years to come out of such a financially driven recession, he noted, “all this started in 2007-2008, we’re now five or six years beyond it. I think the US has completed its deleveraging process to a large extent and our private sector is starting to come back but even when that happens, a lot of caution remains, investors remain cautious, consumers remain cautious and so the recovery tends to be much more subdued”.
“That means we can’t expect anything like the boom of the pre-2007 period yet for some time,” he stated.
