Headwinds Facing Global Economic Recovery

  • 26 August 2013

Several reports have indicated strong recovery of many economies around the world in recent times. In the United States, several reports and statements made by Federal Reserve officials have indicated a strong recovery in the world’s largest economy. Even the German economy has showed signs of improvement in the second quarter, due to a rise in domestic consumer demand.

According to the Bank of Italy, the country’s economy has shown “first signs of a slow recovery” and the Eurozone on the whole has seen an uptick in consumer sentiment, the highest in two years (according to the European Commission). These positive signals hold immense importance for the global economy as they have been registered in countries that play a pivotal role in the global economic system and who until recently were under tremendous strain.

However, there have also been indicators that point to a contrary trend in some of these economies that suggest the fragility of the recovery and point to potential setbacks in the future. International Monetary Fund Managing Director Christine Lagarde has issued a warning that central banks in Europe, the US and Japan should not begin to taper their stimulus policies, which were introduced in the aftermath of the 2008 financial crisis. She stressed that the need for such policies continues to exist for all economies.

There are other indicators that suggest fragility of the economic recovery, necessitating caution in dealing with the green shoots that are visible. This also suggests that the ongoing recovery in the global economy continues to face headwinds. Rising unemployment, slow growth and growing government debt levels are all its indicators. Signs of slowdown in emerging economies, such as China, India and Brazil, have further increased the uncertainty.

These conflicting signs reflect complexity of the global economic landscape under the present circumstances. They also emphasize the need for extreme caution and make a case against over-optimism. These signs also stress the need for governments, especially in advanced countries, to coordinate with each other in order to find balance in policies to tackle the consequences of the global financial crisis. This will also help consolidate the improvement that has been achieved so far.