As financial shocks keep pummeling global markets, growth weakens swelling the ranks of unemployed, especially in USA, and euro-zone still mired in sovereign debt crisis issues, the institutional leaders have spoken in unison for bold and coordinated actions to overcome the serious risks that the global economy currently faces.

USA, the largest economy grew by less than one per cent in the first half of 2011 and there was nil job addition in August, adding to the overall gloom. Unemployment remains at 9.1 per cent – and would be so through 2012, according to White House - even as President Obama keeps desperately urging Congress to agree on a balanced deal with spending cuts and new revenue in putting through the long-term fiscal deficit reduction. On the other side of the Atlantic, EU leaders have yet to arrive at any credible solutions to both financing debt-stressed peripheral states and securing the solvency of the banking system.

Economy and jobs has become the central issue for Americans and President Obama, campaigning for his re-election in 2012, has already seen his popular rating down to lowest levels over his performance on this front though voters look even more negatively at the Republicans stoutly resisting any new spending that would add to the federal budget deficit. The President was to unveil his plan for new infrastructure spending and extension of payroll tax cuts and unemployment insurance in an address to the Congress, back from recess, on September 8. He has repeatedly challenged Republicans to put the country before party and help revive the economy and create jobs.

Meanwhile, the United Nations agency, UNCTAD, has warned that economic recovery “may come to an end in developed economies because private domestic demand remains weak and supportive macroeconomic policies are being replaced by austerity measures as governments try to regain the confidence of the financial markets”. This, despite the “irresponsible behavior” of financial institutions including credit agencies leading to the 2008 global financial crisis.

A shift from fiscal stimulus towards fiscal tightening is “self-defeating” for most stagnant developed economies, its Trade and Development Report 2011 said. Developing and emerging economies might face financial instability and speculative capital flows generated in developed countries and would not be spared by a new recession in the North.

Prolonged political battles in US Congress over debt ceiling revision in July-August had triggered the historic downgrade of US sovereign rating by Standard & Poor’s one of the three leading credit rating agencies. In Europe, the central bank leaders have urged EU to move quickly to ensure that the euro zone’s debt crisis does not become seriously worse. A monetary union without some form of fiscal federalism and coordinated economic policy would not work, another group of European leaders said in a statement on a day the markets plunged on fears of debt crisis exploding.

In striking contrast to fiscal orthodoxy associated with IMF, its new Managing Director M. Christine Lagarde has said USA must act to secure long-term fiscal consolidation without choking growth and jobs in the short-term. The World Bank President Robert Zoellick noted the world was entering “a new danger zone”, and said in USA, spending cuts involving a look at social security and other entitlements and well must go with new revenues on the lines of widely-talked tax code reform with broadened base and lower rates.

Both institutions have thus indirectly backed the Obama Administration’s stand for a balanced approach in bringing about deficit reduction over the next decade. In her recent speeches, Ms. Lagarde has said that fiscal adjustment must resolve” the conundrum of being neither too fast nor too slow,” and what was needed was “a dual focus on medium-term consolidation and short-term support for growth and jobs.” Potential measures to support growth include policies to advance planned infrastructure or to support job creation. She is also supportive of central banks” readiness to “dive once more into unconventional waters” if required. Monetary policy should remain “highly accommodative as the risk of recession outweighs the risk of inflation”, she said.

While underlining the gravity of the fiscal crisis and the political gridlock in Washington US Fed Chief Ben Bernanke has not committed himself to a further monetary stimulus, like quantitative easing or QE 3, beyond the decision to keep the near zero interest rates till mid-2013. Nor has he ruled out the possibility of exploring further options during a two-meeting of the Fed Policy Committee by the end of September, though he pointed out most of the economic policies that support robust economic growth in the long run are “outside the province of the central bank”.

On Europe, Ms. Lagarde who had earlier been involved as France’s Finance Minister in sorting out debt difficulties of peripheral countries, said urgent and decisive action was needed “to remove the cloud of uncertainty hanging over banks and sovereigns in Europe”. Financial exposures across the continent are transmitting weakness and spreading fear from market to market, country to country, periphery to core. She favours stronger financing to countries hit by the debt crisis which could come from the private or official sector, including continued support from the ECB. Secondly, the banks need urgent re-capitalisation, with public funds if necessary, to enable them to withstand “the risks of sovereigns and weak growth”.

UNCTAD has projected a slowdown for the world economy from about 4 per cent GDP growth in 2010 to around 3 per cent in 2011. Growth performance is strong in developing economies which are expanding at above 6 per cent, as against 1.5 to 2 per cent for developed economies. East, South and South-East Asia continue to record the highest GDP growth rates - more than 7 per cent in 2011 - increasingly driven by domestic demand though this region is undergoing a moderate slowdown owing to supply-chain effects from Japan, tighter monetary conditions and weak demand in some major export markets.

China’s growth is lowered to 9.4 per cent while India’s expected 8.1 per cent growth in 2011 is based mainly on domestic consumption and investment and positive contribution of net exports. But these countries remain vulnerable to external trade and financial shocks that would strongly affect the volume of their exports and the prices of primary commodities, as in 2008. (IPA Service)