Global Economic Prospects and Challenges

Article Submitted By Dr. Zia-Ur-Rehman | 28-Jul-2012 | Views: 895

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This is a time of opportunity, for both Asia and the world. We are enjoying a period of rapid global growth and low inflation that has not been seen since the 1960s. This year, global growth, fuelled by continuing worldwide productivity improvements, remains high-despite rising interest rates and continued high oil prices. We expect 2007 to be another year of solid and broad-based growth. In the United States, the speed of the expansion appears to have moderated. But expansions in Europe and Japan will support global demand. China and India will continue to grow rapidly. And prospects are good in many other countries, including some of the poorest. However, the global growth cycle may be close to its peak. Educated and skilled labour is in tight supply, and the scope for continuing productivity improvements may be diminishing.

The best hope for continued high growth lies in further increases to international trade. If this does not happen, the outlook is less encouraging. In fact, I see three clear risks to global economic prospects. First, high oil prices could still lead to higher inflation. Second, there is the continued risk that global current account imbalances will unwind in a disorderly way. Third, there is a growing risk that protectionist sentiment will overwhelm good sense. If it does, all other risks loom larger.

The first risk is continued high oil prices. Up to now, the world has lived with high oil prices without serious problems. But these may emerge if supply remains tight. Oil-producing and oil-consuming countries have generally reacted sensibly so far. For example, the Gulf Cooperation Council countries have increased planned investment to expand oil and gas output and refining capacity. And countries such as Indonesia and Egypt have reduced subsidies to consumers and replaced them with targeted social spending. But we are not out of the woods yet. We still need more investment and energy conservation. And it is important to avoid mistakes. Attempts by producer-country governments to make short-run gains by taking a larger share of oil and gas revenues will backfire if they result in reduced efficiency and lower investment. So I would urge governments to consider carefully how to get the most benefits from oil and gas resources for their citizens in the medium-term. The second risk to economic prospects is a disorderly unwinding of global imbalances. The current account imbalances between the United States and other large economies are not sustainable. And they are creating further imbalances, both economic and social. There is broad agreement on what should be done to reduce these imbalances in an orderly way. For the sake of its own economy, as well as the wider world, the United States should take advantage of its good growth performance to make sustainable reductions in its structural fiscal deficit. For the sake of their own growth, as well as the growth of the wider world, Europe and Japan should implement further structural reforms-especially product market reform-and prepare for the impact of aging populations on their budgets. And for the sake of its own economic stability, as well as the stability of the wider world, China should strengthen its financial sector, boost domestic demand, and use the exchange rate flexibility it gave itself a year ago. The third risk I want to talk to you about is protectionism. The suspension of the Doha Round talks is deeply disappointing and damaging. It delays an agreement that would raise prosperity and support growth around the world. And it feeds a growing inclination towards at best bilateralism, and at worst protectionism. The stakes are far too high to accept failure. Let me take this opportunity to call on the G-7 countries and the major emerging market economies to intervene quickly to conserve the gains made in negotiations so far, and to put the Doha Round back on track. On trade, the world will either go forward to greater growth and broader opportunities, or backward, to narrow nationalism. We should not fool ourselves that there is a comfortable middle ground.

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