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Global Financial Crisis is Over But Risks Remain: Economists
The Global Financial Crisis is well and truly over but risks remain for the U.S. economy, two leading global economists warned at the Credit Suisse Asian Investment Conference today.
In the Keynote Economics Session of the AIC, delegates heard from two members of the U.S. President’s Economic Recovery Advisory Board - Laura D’Andrea Tyson, Professor of Economics at Haas Business School, and Martin Feldstein, Professor of Economics at Harvard.
“Evidence is mounting that the global economy is on a sustained recovery path, compared with just a few months ago when there was more discussion of a possible double-dip recession.” Professor Tyson said.
However, she also noted that: “There are reasons to be concerned about the US in 2010” – including that fiscal stimulus efforts could drag on the economy, and that local and state governments financial situations would continue to worsen. She also warned that many of the forecasts of a recovery in the U.S. were based on a recovery in the housing market.
Professor Feldstein also kicked off on a positive note. “Let me start with the good news, the financial crisis is over,” he said. “But this is not an ordinary business cycle.”
He noted that traditionally, downturns in the business cycle were a product of the Federal Reserve increasing interest rates and slowing growth to combat inflation. But since this downturn was caused by the mis-pricing of risk, moves to lower interest rates had not gained much traction.
“There is a significant risk that we will see a double-dip recession before the year is out,” he said, referring to the U.S. He said the current recovery had been buoyed by one-time incentives – such as those for the auto industry – and that the current recovery may run out of steam without any further such one-off boosts.
Professor Feldstein highlighted three main concerns for the U.S. economy: Consumption, Credit and Confidence.
On the consumption side, households have lost US$10 trillion in wealth through the crisis, and unemployment remains very high, he said. At the same time small businesses, vital to U.S. growth, are having difficulty getting credit from their local banks due to worries about their commercial real estate loan portfolios. And finally, even with rising GDP growth, businesses aren’t confident in the future – they look at the enormous fiscal deficits and worry that taxes loom.
Leading up to the current global recession, Professor Tyson pointed to what she described as the “missing risk premium.” She hastened to add that this same dynamic can happen on the other side, as we emerge from recession and investors over-price risk.
“When someone writes an article comparing the U.S. to Greece, that is fear-mongering at its worst,” she added, referring to a recent press article on this topic. While the U.S. will have an anemic recovery, she believed any theory that the U.S. could not finance its debt was not credible. Professor Feldstein agreed, but cautioned that the current path of the U.S. economy pointed to higher long-term interest rates.
Moving from one economic superpower to another, Professor Feldstein stated that China was likely to address its trade imbalance by increasing imports rather than reducing exports, and that the growing affluent in China would increase demand for high-end imports.
Professor Tyson was impressed by the Chinese government’s effective stimulus package and its ability to increase domestic demand while broadening economic gains of China’s rural population. Both professors agreed that the convertibility of the Chinese Yuan remained some way off, although anticipated that the government would allow it appreciate. They agreed it was politically difficult for China to shift to convertibility when U.S. politicians made statements demanding such a move.
Finally, Professor Feldstein noted that Greece had clearly encountered problems by not being able to devalue its currency, the Euro. “There is no happy story for how Greece gets out of this,” he told the audience.
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