World Economy Staggering Under Debt Burdens, Political Tensions

The global economic situation is serious but not unmanageable, says the SEB.


The Nordic financial services services notes that amid a sluggish economic climate in the next couple of years, the OECD countries will achieve annual GDP growth of only 1-2 percent.


"Perceived economic risks are tilted towards the downside, with a recession risk of 30 percent. Unemployment, especially among young people, will get stuck at high levels in many countries and will be a source of social and political unrest. One bright spot in this economic gloom is growth in China and elsewhere in Asia," states the SEB.


According to the SEB, the region will be affected by the weakening of the US and European economies, but given the absence of major debt problems its economic policy makers will have room for flexibility.


The outcome will be annual growth close to trend (6-8 percent).


A number of important decisions, which must be made in the near future, will determine whether the recession risk increases or decreases, notes the SEB. Both when it comes to long-term budget austerity and short-term stimulus measures, the US Congress's willingness to work together will be tested.


The euro zone countries must approve the July 21 crisis agreement, after which their capacity to take decisive action on common sovereign debt and fiscal policy issues will also be tested. In addition, decision makers will have to address issues related to government debt restructuring. Meanwhile a weakened banking sector must regain its strength through recapitalisation.


The SEB warns there is no quick fix that will resolve these issues. "The world has to deal with deep seated systemic problems, which will require systemic solutions transcending national boundaries. The necessary adjustment processes will continue for another few years."


The world economic situation deteriorated this summer due to negative interactions among various problems:


1. a continued need for sovereign and household debt reorganisation;
2. a loss of economic dynamism due to the fading effects of the enormous 2009-10 stimulus measures, plus the increasing negative impact of shrinking wealth;
3. an almost empty economic policy toolkit;
4. incomplete repairs in financial sector balance sheets following the global recession, and
5. signs of weak political resolve at both the national and international levels.


This makes today's set of problems more complex than the ones prevailing before the autumn 2008 crisis.


There is increasing pressure on central banks to maintain historically low, near-zero interest rates as financial reorganisation policies are approved and implemented. The inflation rate is falling in Western economies, giving the central banks a degree of freedom to enact further stimulus measures.


The SEB expects both the US Federal Reserve (Fed) and the European Central Bank (ECB) to leave their key interest rates unchanged during the rest of 2011 and throughout 2012.





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