EFIC says expansionary policies key to 2009 world economic outlook

18 December 2008

The December World Risk Developments newsletter of Australia’s export credit agency (EFIC) – released today – says the global economy slowed by more than expected and prospects for the world economy in 2009 will be dependent on whether governments’ financial rescue plans and expansionary policies gain traction.

Synchronised downturn

“The world economy is now in a synchronised downturn that could be one of the most severe in the post-war period,” says EFIC Chief Economist Roger Donnelly.

“Typically trade growth has outstripped GDP growth. Now, a significant risk is that world trade growth could fall below GDP growth.”

“Certainly, it will be the role of credit agencies, around the world, like EFIC to continue the assistance they provide to help meet the gap that exists in the financial market and ensure exporters are appropriately financed.”

Interventionism justified to revive willingness of private sector to lend

The financial crisis has brought with it a strong swing round to government interventionism.

Some of that interventionism is justified, he says. “But, intervention will only work if it revives the willingness of the private sector to lend and borrow.”

“The world needs macroeconomic stimulus at the moment because of the crisis of confidence in the private sector. Otherwise production could collapse, leading to further rounds of bankruptcies, defaults and forced asset sales.”

The idea that the previous boom and bubble were all the fault of central banks providing too easy money for too long, and market forces will now sort out the mess, looks misguided, he says.

“It overlooks the large savings surpluses that Gulf economies and East Asian economies led by China have built up over the past decade – surpluses that could be earned only because the rest of the world was willing to accept corresponding deficits.”

“These imbalances have proved unsustainable and are now being unwound.  The unwinding and rebalancing will proceed more smoothly if governments in all economies, but especially surplus ones, support domestic demand, and surplus economies allow their currencies to appreciate.”

Anti-business policies

As welcome as macroeconomic stimulus may be, Donnelly says there a risk that a raft of other anti-business (and anti-market) policies that governments may now dust off to shield themselves from contagion and recession.

“But, a descent into wholesale protectionism is unlikely.  The G20, for instance, have recently said they want to press on to a conclusion of the Doha Round.”

Upside for resource sector

Donnelly says the one of the upsides of the year ahead is that ‘resource nationalism’ is in decline.

“In the resource boom, countries had tried to gain a greater share of resource revenues by renegotiating tax and royalty rates and equity shares. But now, with commodity prices and associated windfall revenues both down, that risk is ebbing.”

“Governments will be content to retain investment.”