4:53 pm - Friday May 24, 1715

World economic recovery requires structural reforms  

The global economic recovery, despite some hiccups, seems to have built up some steam.  While growth is strongest in developing countries, it is still slower than the pre-crisis period. A cautious attitude and ongoing aversion to risk mean that business confidence is tepid – especially in the EU. Experts think the prospects for a durable and sustained recovery hinge on whether national governments demonstrate their commitment to substantive structural reforms, according to the editorial of the current ICCB News Bulletin of International Chamber of Commerce-Bangladesh released on Wednesday.

ICC Bulletin Cover FinalSome signs of improvement have emerged more recently. The euro area has finally come out of a protracted recession, with gross domestic product (GDP) starting to grow again; the economy of the United States of America continues to recover; and a few large emerging economies, including China, seem to have at least stopped a further slowdown. World gross product (WGP) is forecast to grow at a pace of 3.0 and 3.3 per cent in 2014 and 2015, respectively.

Inflation remains tame worldwide, partly reflecting excess capacity, high unemployment, fiscal austerity and a continued financial deleveraging in major developed economies. Among developed economies, deflationary concerns are rising in the euro area while Japan has managed to end its decade-long deflation. Among developing countries and economies in transition, inflation rates are above 10 per cent in only about a dozen economies scattered across different regions, particularly in South Asia and Africa.

The global employment situation remains dire, as long-lasting effects from the financial crisis continue to weigh on labour markets in many countries and regions. Among developed economies, the most challenging situation is found in the euro area, in which the unemployment rates had reached as high as 27 per cent in Greece and Spain, with youth unemployment rates surging to more than 50 per cent. The unemployment rate has declined in the United States, but remains elevated. In developing countries and economies in transition, the unemployment situation is mixed, with extremely high structural unemployment in North Africa and Western Asia, particularly among youth. Pronounced gender gaps in employment continue to characterize labour markets in numerous developing countries.

A number of countries are making concerted efforts to improve employment conditions, such as aligning macroeconomic policies appropriately with domestic conditions and taking steps to improve productivity and innovation. However, further public investment in skills training and upgrading will be necessary to integrate those groups that have been excluded.

After reaching a plateau in 2008, global trade is showing improvement now, but is still trending at or below the average for the previous few decades. The prospects for world trade are expected to improve, driven by a modest increase in demand in Europe, further recovery in the United States and

a return to more dynamic trade in East Asia. Growth of world exports is projected to be 4.6 per cent in 2014 and 5.1 per cent in 2015. Trade in services appears to be recovering faster than merchandise trade, and is expected to continue growing over the forecast period after a noticeable improvement in mid-2013.

Great uncertainties and risks for global economic growth and the financial stability are inextricably associated with the unconventional monetary policies, such as quantitative easing (QE), adopted in major developed countries. Uncertainty and risk come into play particularly when the central banks of these countries start to change their stances on these policies. A bumpy exit from QE could lead to a series of disruptive events, such as: a surge in long-term interest rates, not only in developed economies but also in developing countries; a sell-off in global equity markets; a sharp decline of capital inflows to emerging economies; and a spike in the risk premia for external financing in emerging economies. Those first-round shocks in international financial markets could transmit quickly to the domestic real economic sectors of both developed and developing countries.

In addition to macroeconomic policies, many countries, both developed and developing, have undertaken various institutional reforms, including reforms in social security, income distribution, financial sector, taxation, energy, transportation, education and healthcare. These reforms are crucial to the rebalancing of economic structure, removal of supply-side constraints, mobilization of resources for long-run investment, and improvement of macroeconomic management and financial regulation.