Emerging markets will need to become the “main source of global demand” if economic recovery is to continue, leading US economist Barry Eichengreen told Emerging Markets yesterday.
“Everything hinges on whether consumers in Korea, or China, and elsewhere continue to spend going forward,” said Eichengreen – “and that’s a gamble.” If emerging market governments begin to cut back too soon on stimulus, global growth could stall, he added.
Eichengreen, professor of economics and political science at the University of California, Berkeley, spoke to Emerging Markets at the end of an Institute of International Finance seminar at which leading economists painted a gloomy picture of global prospects.
Their views contrasted sharply with the upbeat assessment set out yesterday by the IMF’s International Monetary and Finance Committee, which declared that “all the components [of a global recovery] are in place.”
Eichengreen and other speakers all but ruled out the prospect of a “V-shaped” global recovery and pointed instead to host of problems that could stall it.
New York University economics professor Nouriel Rubini told the seminar that “the global economy is on the floor and trying to rise.” But, he added, “we are stuck in a problem and we are not going to be able to resolve it any time soon.”
Eichengreen talked of the “gloomy prospects for an upturn”, especially in advanced economies. Consumption figures in the United States and other advanced economies “are better but still bad,” he noted. The US is “looking to export more” on the back of a weakening dollar, he noted. “But where is the demand going to come from?”
The key to this demand lies with emerging market economies, he suggested. Roubini agreed that the role of the US a “consumer of last resort” is over for the time being.
There is a glut of production capacity in the global economy and countries such as China are adding to this, by devoting much of their fiscal stimulus to new investment, he said. “Only public demand is keeping things going”, Roubini suggested.
He and others emphasised that now is not the time for fiscal and monetary stimulus to be withdrawn in advanced or emerging economies. But on the other hand there are dangers of courting inflation if stimulus is continued for too long, Roubini noted. “There are policy risks in doing anything too soon or too late.”