Friday, August 07, 2009

World May Witness W-Shaped Recovery

Nobel laureate Paul Krugman says a double-dip in the global economy is a 'real possibility' if weak labour markets continue to act as a drag.

Nobel prize-winning economist Paul Krugman says a double-dip in the global economy, or a second leg to the downturn, is a "real possibility", meaning that the world may go through a W-shaped recovery.

"That's a real possibility. Some of the support measures, especially fiscal stimulus, will reach their peak later this year, and then recede," Krugman told Business Times in an e-mail interview.

"If weak labour markets continue to act as a drag, a W-shaped recovery is quite possible."

A professor at Princeton University and a New York Times Op-Ed page columnist, Krugman won the Nobel economics prize last year for his works in trade patterns.

A double-dip recession happens when gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth.

Krugman said he does not foresee a sharp rise in global inflation, even as governments worldwide are pumping in hundreds of billion dollars to counter the impact of the worst global recession in decades.

"No, just no. The stimulus plans may look large by historical standards, but they're not enough to close the output gap, so they are not inflationary," he said.

"Monetary tightening won't happen, I hope, until the gap starts to close, which probably is at least a year away.

"The output gap is the difference between potential GDP and the actual growth in the economy. Many expected the world economy to grow at a rate below its potential in the next couple of years in a slow recovery.

Krugman will be speaking at the World Capital Markets Symposium in Kuala Lumpur next week. He will also join a panel discussion on reshaping the world economy at the same conference on Monday.

He believes that the emerging economies of Brazil, Russia, India and China, commonly known by the acronym BRIC, will "probably" overtake the Group of Seven in terms of output. But this will not happen anytime soon.

"They have a lot more people, and productivity is converging (with the advanced economies)," Krugman remarked.

"But I think we're 20 or more years from the point where China overtakes the US, and more before the emerging markets surpass the West as a whole."

A new international reserve currency may also emerge "someday" to supplant the US dollar, but "not soon".

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