Recovery for the global economy, which is set to contract by 3 per cent this year with the ongoing recessions in USA, Europe and Japan, will be protracted, going by the trends in mid-2009. The world's financial system which fuels growth is still in a state of disrepair reflecting the inadequacy of efforts made, however massive the scale of bail-outs for financial institutions, principally in USA, the epicentre of crisis.

International trade has collapsed and cannot revive strongly without recovery in real economy which again is dependent on the restoration of normal credit flows.

International fire-fighting is on but there are no clear signs of the storm abating yet. There is now a drive to generate optimism clutching at straws like a moderation in the pace of deterioration in major economies and drawing some comfort from the expectation of an early bottoming out of the slowdown in leading emerging economies, China in particular. World equity markets are now perceived to be reflecting greater confidence in the stability of the banking system, especially in USA.

Fiscal stimulus to keep economies afloat has been the strongest in USA, followed by China where the sharpest fall in exports has plunged the economy in the worst slump in three decades since the launch of reform era. European zone has not matched the massive American effort (787 billion dollars), given its own social security systems and its fears of igniting inflation from large fiscal expansion. But IMF finds in EU the absence of a pro-active strategy to deal with the weakened financial system, reviewing its capital needs and cleansing the balance-sheets of its impaired assets. USA is ahead on this but commensurate results are yet to come.

IMF assessment is that the global GDP was contracting at an annual rate of six per cent in the last quarter of 2008 and in the first quarter of 2009. Major economies driven by exports like Germany, Japan and China have taken severe beating. Even if unaffected by international financial sector shocks, China finds it hard to find a growth engine to make up for the export decline. Its 546 billion dollar stimulus is designed to boost domestic consumption and build infrastructure.

The economy seems to be making modest recovery at a rate of 6 per cent against the official target of not less than 8 per cent for 2009. It has again raised export rebates for over 2,000 items including processed farm products and high-tech and value-added items. China is also replenishing its stock pile of resources - raw materials including minerals which gives a push to a resurgence in commodity prices. China does not expect a significant revival of external demand and its economists do not think the world would have fully overcome the recession within three to four years.

Meanwhile, its assertiveness on the global stage is on the ascent, being the biggest creditor in financing US external deficits, and China and USA are now into a new Strategic and Economic Dialogue due formally to begin in Washington in July. US Secretaries of State and Treasury Ms. Hillary Clinton and Mr Timothy Geithener have already visited Beijing.

India maintains it is the fastest growing economy in the current global downturn though contrary to official projections of 8 to 8.5 per cent, growth turned out to be 6.7 per cent in 2008/09 , certainly much higher than even the pre-recession growth record of advanced economies. Whatever our fondness for 8 to 9 per cent growth, international forecasts for India range from 4.5 to 5.5 per cent while RBI has projected 6 per cent for the fiscal year 2009/10. Even this order of growth has to come from the level of domestic investments and public expenditure.

The Indian budget to be unveiled on July 6 will be focussed on revival of sectors affected by loss of exports and improving investment climate, apart from employment and programmes designed to promote inclusive growth. In recent months, portfolio inflows have picked up and there is a build-up in business confidence with plans for new capital raisings. There has not been much attention to job losses in informal sector while public sector employees are well taken care of.

Reporting on global capital flows, the Washington-based International Institute of Finance (IIF) says net private flows will bottom out at a seven year low of 160 billion dollars in 2009, a fall from 392 billion in 2008, and rise to 373 billion in 2010. Overall, it notes an easing in the retrenchment in capital flows, especially portfolio investments since April, after the net outflows between October last and March 2009. Sovereign and investment grade borrowers are also returning to global capital markets, it is said. While foreign direct investment flows have been stable, international bank lending remains depressed.

IIF also notes some stabilisation in the output contraction in some economies reflecting the impact of huge policy stimulus, monetary and fiscal. But any upturn in the next 18 to 24 months is likely to be “anaemic” in spite of substantial policy support. Over the coming few years, it points out, there would be difficult debt situations to resolve, global de-leveraging cycle takes years to run, and unemployment rates will keep rising.

Unemployment in the OECD area (advanced countries) was 7.8 per cent in April—euro area 9.2 per cent, USA 9.4 per cent and Japan 5 per cent. President Obama has said that in the first few months, the stimulus spending has generated some 150,000 jobs. By 2010, some 3.5 million jobs would have been saved or created, as projected.

Emerging economies still face challenges, according to IMF. Their growth will be impeded by financing constraints, weak external demand and associated spill-overs to domestic demand while low commodity prices would affect many developing countries. IIF, however, expects China and India to stand out as resilient economies in the period 2008-10 and puts. India's growth at 5.5 in 2009 and 7 per cent in 2010.

Drying up of capital flows as well as the stark decline in exports and resulting decrease in trade surplus may have helped reduce global imbalances, a persistent feature of the financial landscape. US large external deficits have lowered while China continues to have trade surplus, though somewhat lower. With steady rise in international crude prices, oil exporters would be making good what they may have lost when prices had gone down to 50 dollars or below for a brief period.

Global policy-makers remain skeptical about recovery prospects in the near future and refer to “significant risks” to economic and financial stability. Finance Ministers of G-8 (leading advanced nations plus Russia) meeting on June 13 in Italy recognised the need for more stimulus in general but at the same time emphasised the need to prepare 'exit strategies' (unwinding the extraordinary policy measures taken to respond to the global crisis) once recovery is assured in order to promote (fiscally prudent) sustainable recovery over the long-term. US Federal Reserve is acutely conscious of this having stretched its balance sheet by around two trillion dollars printing money. (IPA Service)