Tuesday, July 2, 2013


Analysis:Major risks ahead for world economy

World,July 2- The risks for global economic growth still loom large as massive public debts, insufficient institutional reforms and the U.S. Fed's hint at a stimulus exit are haunting the world and implying an anemic recovery, economic analysts warn.

The latest statistics show that the U.S. economic growth was more tepid than previously estimated in the first quarter, expanding at a 1.8-percent annual rate, held back by weaker government spending and business investment.

Meanwhile, the eurozone remained mired in a recession and the malaise is now spreading to the so-called core countries such as France and Italy.

Japan's economy seemed to gain some momentum in the first half of this year thanks to Abenomics, but its sustainability has been largely questioned. Affected by reduced foreign demand and domestic economic adjustments, some developing countries and emerging markets this year have also witnessed a slowdown in the pace of their economic growth.

Moreover, three major risks lie ahead. First, chronic government debt is increasing the possibility of fiscal crisis.

Some economists believed the greatest risk facing the global economy is the continuous exacerbation of government debt, which is plaguing both developed and developing countries.

What is noteworthy is that the first half of 2013 witnessed a significant shift in global public opinion regarding the public debt.

In April, the debate over debt heated to a boil when a group of economists pointed out a basic error in one of the papers of Harvard professors Kenneth Rogoff and Carmen Reinhart -- a paper that many policy makers have used as a foundation in proposals to massively cut back government spending.

The new study shook the intellectual foundation of the global austerity movement. Since then, discussions over public debt experienced a sudden cool-down.

Many economic analysts said the shift in public opinion showed that when countries find it hard to solve the debt issue, they choose to manipulate popular opinion.

However, a high debt level is still a problem that deserves concern.

Harvard economist Lawrence Summers wrote: "We forget at our peril that debt-financed spending is not an alternative to cutting other spending or raising taxes. It is only a way of deferring those painful acts."

Second, adjustment fatigue and the lag of economic structural reforms is a common challenge facing governments worldwide.

Countries around the world already unveiled rounds of monetary and fiscal stimulus since the 2008 financial crisis, and now there is simply limited room for macroeconomic policy maneuvering.

Analysts believe that further economic structural reform is key to ensure robust and sustained growth.

In the World Economic Outlook released in April, the International Monetary Fund (IMF) also called upon world's major economies to ramp up efforts in their institutional reforms.

However, with numerous difficulties, the paths to structural adjustments are destined to be bumpy as governments always have to choose between short- and long-term pains.

Third, the world's great "money binge" is likely to come to an end. On June 19, U.S. Fed Chairman Ben Bernanke released the first clear signal of a possible exit of the Fed's massive bond-buying program, the so-called QE3.

The Fed's exit talks jolted global financial markets and led to intensive volatility and massive sell-offs.

As some economists believe, the Fed's move will be the biggest factor in global economic uncertainties in the second half of 2013.

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