Davos: The outlook for the global economy this year is decidedly dour, but economists had mixed views yesterday about whether a recession could spread around the world.
Speaking at the World Economic Forum, econ-omists from Asia and the United States and government ministers from India and China said the US economy remained on a downward course, but they were divided about whether US ties with other countries could drag them down into a feared recession.
"If there is a tremendous slowdown in the US economy, then we must be worried about it," said Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, as concern grew over market turmoil and a possible US recession.
He said China was in a position to weather any slowdown because of its growth, and its position as a top emerging market that has expanded its trade with countries other than the US.
Stephen Roach, chairman of investment bank Morgan Stanley in Asia, pointed out that while the US is the largest economy, its links to world markets were indisputable, and that could have ramifications for other nations.
"The rest of the world is not as resilient," he said.
Asked by a Mexican businessman if his country would be spared if the US goes into recession, Roach was blunt.
"My good friend from Mexico, you're in trouble," Roach said. "Mexican exports to the US account for 25 per cent of your GDP. Same number for Canada. How can the US go into recession and Mexico be fine?"
Pneumonia
Nouriel Roubini, chairman of New York-based Roubini Global Economics, cited the maxim that if the US economy sneezes, the rest of the world catches a cold, but said this time the diagnosis in the US was worse. "In this case the US is going to have a protracted case of pneumonia," he said.
The impact of the sluggish US economy, and what it may portend for other nations, hung over the event, even after the US Federal Reserve Bank cut its benchmark refinancing rate to 3.5 per cent from 4.25 per cent in response to the global market meltdown. "The United States economy will correct itself," said David O'Reilly, chairman and CEO of Chevron Corp. "I'm an optimist when it comes to the length of what may be a slowdown or a mild recession... the outlook is still pretty good."
Economists also split along two lines over the role of central banks in bringing the world to the brink of recession, and whether institutions like the Fed were equipped to steer the global economy out of danger. John Snow, the former US Treasury secretary, said central banks have performed remarkably over the last two decades - better than any time in history, perhaps - and continue to make the necessary adjustments.
"The issue of whether central banks are capable of vigorous action, bold action, was answered yesterday," Snow said, referring to the Fed's rate cuts. "They can't see the world ahead perfectly, but who can?"
But Joseph Stiglitz, the 2001 Nobel Prize winner for economics and a critic of free market champions, and billionaire philanthropist George Soros disagreed.
"What we have now are the foreseeable consequences of bad economic management," Stiglitz said.
Lawrence Summers, former Harvard University president and Treasury secretary under former US President Bill Clinton, also said central banks have lost their way.
"I think it's hard to give central banks a very high grade over the last couple of years on recognition of... bubbles and the ability to address them," he said.
