Columns - The Sunday Times Economic Analysis

The threatening impact of the global recession

By the Economist

The global recession appears to be getting worse rather than better. There are few signs of improvement. What is clear is that it is threatening countries all over the world. Around the world lay offs and closures, bail outs and unemployment are the order of the day. Despite this evolving gloom, in as far as Sri Lanka is concerned, the official position is that it would hardly affect the Sri Lankan economy. The Sri Lankan economy is expected to grow by 5 to 5.5 percent, a slight revision from the previous 6 to 6.5 percent. If this was achieved Sri Lanka would be one of the higher growth countries in the world.

The global recession shows no signs of abating. The latest assessment of the IMF is that the world economy is shrinking and facing the severest recession since World War 11. The IMF review of the world economy thought that "The world economy is facing a deep recession," and the severity of the decline in the world economic growth is in the words of the IMF unprecedented. "World growth is projected to fall to its lowest rate since World War II". World economic growth is expected to be just above zero at 0.5 percent.

The advanced economies are expected to contract by 2.0 percent which the IMF observes is their first annual contraction in the post war period. Therefore the global economy is facing a downturn after over six decades. Moreover, these IMF estimates are a further downward revision from those it estimated less than three months ago. One wonders whether the growth estimated would be revised downwards further to show that global economic growth is zero or negative. Most disheartening and discouraging is the news that the policies adopted by developed countries has not shown any signs of resolving the problem and the recession is likely to continue throughout 2009 and perhaps into 2010.

There are many economists who think the bail out to banks and large corporations will not help the recovery process except to halt immediate unemployment and loss of income. In the words of the IMF, "Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy". However IMF is of the view that priority is the financial sector. It says that "A sustained economic recovery will not be possible until the financial sector's functionality is restored and credit markets are unclogged."

The deceleration in economic growth is widespread. In the United States where it all started, the economy is expected to contract by 1.6 percent. The severity in the situation there is evident in the closure of some business enterprises and the downsizing of others. It is interesting that the specialty coffee shop chain Starbucks is closing down a good number of its shops. This is a clear indication that customers are economising on consumption and lower incomes and higher unemployment is curtailing demand for non- essentials. In the same vein one might refer to the fact that one of the businesses that have increased profits has been the Mac Donald’s chain. A clear indication that people’s demand is shifting from higher value goods to lower priced ones, despite the recent trend to wean away people from junk foods.

These trends in the American economy are significant for the Sri Lankan economy as the US is a major market for the country’s main industrial exports, especially garments and also for rubber and leather goods. These items of export on which the country is heavily dependent are likely contenders for cuts in expenditure. Furthermore they become price sensitive and when our competitors like Bangladesh, Vietnam, India and China are able to supply them more cheaply, we can easily lose our markets.
EU countries would shrink by 2.0 percent with Germany, Europe's biggest economy, shrinking by 2.5 percent this year after a 1.3-percent expansion in 2008, Britain, would suffer the most with GDP contracting 2.8 percent. Therefore, what applies to the US market is equally relevant to the European market. These two markets account for over 90 percent of our market for garments, the main manufacturing export that accounts for over 50 percent of manufactured export earnings.

Asian economies are also adversely affected. Japan's economy would shrink by 2.6 percent in 2009. The growth of developing countries are expected to halve to 3.3 percent in 2009, China’s growth is expected to decline from 9 percent to 6.7 percent and remain the world's fastest-growing economy, However growth and inflation estimates in China are suspect. India's economic growth would slow to 5.1 percent after 7.3 percent last year.

The recession particularly in the US and EU countries would affect the country’s manufactured exports that have already taken a beating. Retrenchment of workers and the closing down of factories have been witnessed recently. The industrial sector catering to the export market is likely to face severe difficulties, especially as other countries in the region are more competitive owing to their lower rates of inflation, lower costs of energy and the depreciation of their currencies. It is therefore essential for the government to look into ways and means by which the competitiveness of our manufactured exports could be maintained. To turn a blind eye to the emerging problems and external shocks is the surest way to compound the problems in the industrial sector and increase unemployment.

The Sri Lankan economy would also be affected through reduced remittances from workers. At first there was hope that while the rate of growth of these remittances may decelerate, the remittances would be around what it has been in the last few years or slightly less. This expectation is diminishing as stories of layoffs of workers in West Asia keep flowing in. There appears to be an immediate firing of workers. The situation for these workers has been so severe that they have left their cars at the airport or nearby roads and boarded flights out of these countries. The workers who have fled include, Indians, Pakistanis and Sri Lankans. They are higher paid construction workers and other employees.

There are large numbers of Sri Lankans in such occupations though the limelight is generally on the large number of maids working in West Asia. It is likely that new opportunities for maids would be reduced, some already working there would lose their jobs and others may have to take serious wage cuts. Whatever be the individual case, the aggregate picture would be one of reduced earnings resulting in lesser remittances. Private transfers or private remittances support the balance of payments in a big way. In recent years about 50 percent of these remittances were from the West Asian countries. Therefore a decrease in private remittances would make a serious dent on the balance of payments. However the Foreign Employment Bureau is of the view that the numbers of Sri Lankans employed in these countries would not diminish. This is difficult to comprehend at a time when those employed are in fact losing their jobs. Besides, s remittances from other areas of the developed world would also be affected. The recession has affected employment and incomes in North America, Europe, South East Asia and Australia. All these are areas from which remittances are sent. The signs are ominous as in all likelihood there would be a significant decline in private remittances this year.

The global realities must be recognised by the government and countervailing measures to reduce their impact must be put in place in order to avert a serious downturn in our economy.

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