World economy in a depressed condition:

Greater integration vital to face external shocks - Prof. Abeyratne

By Lalin FERNANDOPULLE

The world economy is in a depressed condition in the current year mainly due to the Sovereign Debt crisis in the Euro Zone, but emerging conditions show a slow recovery next year said Senior Lecturer, Economics, University of Colombo Prof. Sirimal Abeyratne.

He said that the world economy made a strong recovery from the US financial crisis recording 5.3 percent economic growth in 2010, but started to slow down thereafter, recording a 3.9 percent growth last year. The world economic growth will slow down further to 3.5 percent this year, according to the IMF World Economic Outlook Projections (April 2012).

Prof.Abeyratne said that while the US economy is likely to improve its output growth, the economy of the Euro Zone is heading towards a contraction.

The US and the Euro Zone which together account for about half of the world output (despite less than 10% population) have a bearing impact over the rest of the world.

Therefore as pluses and minuses get cancelled, the net growth outcome would be too small to make a substantial contribution to the economies of the rest of the world.“However,along with the US economy, some other advanced countries, including Japan and UK, are likely to improve their output growth this year”, he said. The intervention of the European Central Bank in providing refinancing operations and the fiscal reform programs of the European governments appear to have eased the debt crisis.

Although, the current year 2012 is due to suffer from the Euro crisis, with an improvement in investor confidence the Euro Zone is on a slow recovery path.

“The threat of a sharp global slowdown eased with improved activity in the United States and better policies in the euro area.

Weak recovery will likely resume in the major advanced economies, and activity will remain relatively solid in most emerging and developing economies. However, recent improvements are very fragile” the Outlook stated.

Given the gloomy economic outlook of the world economy, the developing countries in the Asian region have also revised their growth projections downward.

Developing Asia is currently the fastest growing region in the world, while the higher growth of the two largest economies in the world (China and India) sustains growth of the Asian region. Along with other countries in the region, Sri Lanka has also downgraded its growth targets for the year 2012.The Central Bank downgraded Sri Lanka's economic growth this year to 7.2 percent from its forecast eight percent.Economic growth in Germany will slump from 2.7 percent to 1.3, France from 1.7 percent to 1.4, Italy from 0.6 to 0.3, China from 9.5 to 9.0, India from 7.8 to 7.5, Latin America and the Caribbean from 4.5 to 4.0 and the Middle East and North Africa from 4.0 to 3.6 percent, according to the IMF.

Prof. Abeyratne said that the current economic downturn in the world as well as the volatile nature of the world economy experienced in the past few years have led the developing countries such as Sri Lanka to choose between two alternative policy options: the first is the greater reliance on the “domestic” economic activities in the context of increased protectionism, anticipating to avoid adversaries of the external shocks; the second is the greater integration with the global economy through trade and investment, anticipating to stand strong against external shocks.