Globalized Recession

Globalized Recession

One thing we are sure about this recession is where it started and how it started. The defaulting and fraud mortgages in the US sowed the seeds of this massive recession. What’s not clear is how deep and wide the impact will be. What’s complicating things is the highly globalized and interconnected world economy.

Some folks had suggested that the growth in developing markets like China and India will help cushion the impact of this recession on global markets. World Bank now says that the Global Economy will actually shrink in 2009.

The World Bank also warned that global trade would shrink for the first time since 1982, and that the decline would be the biggest since the 1930s.

“This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis,” said Robert B. Zoellick, the World Bank’s president. “We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest.”

The impact of the global slowdown varies widely among countries, and the drop in prices for oil and other commodities has created both winners and losers, But as a whole, the bank said, the so-called emerging-market countries face a combined financing gap of at least $270 billion and as much as $700 billion over the next year or two.

The World Bank also stated in another opinion

China’s economic growth will plunge in 2009. The United States is in severe recession. For the world’s economy to recover, these two economic powerhouses must cooperate and become the engine for the Group of 20. Without a strong G-2, the G-20 will disappoint.

We also know that Eastern Europe in the brink. EU countries are obviously looking out for their own countries and backlash from the populace and hence rejected the pleas for help.

While each country or at least the top 10 global economies are watching their own back, by ignoring the globalized economy or the world economy, we are risking the impact from unintended consequences. The longer this recession lasts, the more countries will go in their respective shells to protect jobs and economy at home. But the economies are so interconnected that ripples travel fast. Chinese economy is dependent on exports. With US retailers falling off the cliff one by one, the relative impact on China is going to be massive. Similarly, India’s IT industry will be impacted as the projects start to disappear and/or shrink in size and scope. Similarly, Germany, Japan, France, Korea, and others are feeling the pinch already.

So, for recovery, the world shouldn’t just look towards US. A more calibrated and coordinated effort is needed. The upcoming G20 summit will be a good place to start that discussion.