While global GDP growth will be negative (by 2.5 per cent) in 2009, for the first time since the second world war, and output in industrial nations as a group would decline by 4 per cent, with world trade contracting by 10 per cent, beginnings of a rebound are visible both in USA and Euro-Zone. Given the serious risks with the financial system yet to be rid of its “toxic” and bad assets, tight credit markets and unemployment rising alarmingly, major economies acknowledge the need to continue with fiscal stimulus until recovery becomes clearer.

The global credit crisis and recession impacted on emerging economies and other developing countries with the spread of financial contagion and sharp declines in exports and negative capital flows, slowing down their growth, and hitting the low-income countries hard. No country was spared the crisis which is attributed to financial globalisation. Originating in the sub prime mortgage segment and spreading rapidly to the entire financial system, USA became the epicentre of the crisis with contagious spread to other developed financial markets and emerging economies.

The crisis wiped out 15 trillion dollars of wealth from the balance sheets of American households. Trillions of dollars were poured into the financial markets, institutions and credit mechanisms by the Federal Reserve and the US Government to prevent a free fall of the world's largest economy while similar actions in Europe were mounted. Some of the major banks in USA, which received Federal bail-out funds, have turned the corner and repaid some 70 billions of Treasury investments. But hundreds of smaller firms have been squeezed out by the recession.

Economists in USA warn that very little has changed with leading banks back into the business of bonus payments. President Obama, who is determined to clean up the mess, said segments of the financial industry were ignoring the lessons of the Lehman collapse and warned that “we will not go back to the days of reckless behaviour and underlying excesses at the heart of this crisis”. Europeans are also in favour of curbs on banks including bonuses. UNCTADs Trade and Development Board points out that financial sector had gained predominance over fundamentals, with large segments of them left to function like “giant casinos”.

The Obama Administration's financial industry reform before the Congress proposes stronger regulations, Federal supervision of all major financial firms and a Financial Stability Oversight Council to bring together all regulators to identify emerging risks and co-ordinate responses. USA also wants financial institutions to hold more capital and manage liquidity risk more effectively closing loopholes in regulation. Failure of regulatory authorities in the run-up to the global financial crisis was cited as one of the major factors for the breakdown of the system.

This will be the principal issue before the Pittsburg Summit of G=20 nations, accounting for 80 per cent of world output, on September 24-25. The thrust of the regulations at both national and international levels would be on preventing a recurrence of the crisis that the world had been plunged into largely by actions of speculative forces operating in the stock, bond and primary commodity markets. The Summit, the third of G-20, will be held in a somewhat more promising outlook for the world economy with signs of recession abating, than in April where the emphasis was on co-coordinated counter-cyclical policies and strengthening resources of global financial institutions, especially IMF. Advocacy of tight supervision of regulation of the financial firms gains momentum the way the Wall Street giants are getting back to old ways.

None of the Governments or central banks are sure how long the world economy would be in doldrums. While in USA, GDP growth decline might get arrested in the third quarter and the recession may be formally declared over in the latter half of the year, the recovery would remain too weak to create jobs, the biggest worry in USA where the unemployment rate had risen to 9.7 per cent in August and was heading into 10 per cent in the coming months. Sluggish growth in 2010 would not make a dent on the unemployment rate, according to Federal Reserve, because of tight credit conditions and other economic constraints.

The view shared by most member-countries of G-20 is that it is too early to backtrack on stimulus policies. The Obama Administration is faced with criticism that despite its 787-billion dollar economic recovery and reinvestment act, it had no effect on moderating unemployment. The Administration could use only 151 billion dollars in six months since the stimulus was enacted by the Congress in February last but it claims that while the bulk of spending would be in 2010,the stimulus contributed to raising output in the second quarter to keep down the decline in growth at 1 per cent from -6.4 per cent in the first quarter and helped to create or save up to one million jobs (as against the 7.4 million rendered jobless since the onset of recession in Decembeer 2007).

According to OECD, the jobless rate in the industrial countries would approach 10 per cent next year with the number of unemployed rising to more than 25 million. Rising levels of unemployment would deter the major economies from withdrawing support to the economy both at the fiscal level and by the monetary authorities, especially the Federal Reserve which had brought down the key policy rate to near zero early this year. Fed is also likely to retain its asset purchases - mortgage-related securities and US Treasury debt to shore up the economy. The question would pose itself whether there should be a continuing globally co-coordinated approach on stimulus as well as more importantly on exit strategies for fiscal prudence and monetary stability.

Exit strategies would have to take into account the country-specific situation in regard to growth and inflation. Fed takes the view that there is no threat of price pressures in USA whereas RBI in India does not rule out withdrawing accommodative monetary policy if inflation, as expected, gets more pronounced requiring responses. The Finance Minister has ruled out for the present any withdrawal of stimulus at an early stage, until at least growth gets stronger.

Ahead of G-20 Summit, the chiefs of WTO, OECD and UNCTAD have called on governments to make stronger commitment to open trade and investment regimes and also make concrete their earlier calls for the conclusion of Doha Round in 2010. Issues relating to climate change would also be part of G-2o Summit agenda as negotiations enter the final stages for the UN Conference at Copenhagen in December. (IPA Service)