A World Bank report says the global economy is recovering. Trouble is it won't feel like a recovery.
According to the report, global GDP, which fell by 2.2% in 2009, is expected to grow 2.7% this year and 3.3% in 2011. Growth will be more spectacular in developing countries. But the report warns it could take years before countries recoup the losses incurred in the worse financial meltdown since the Great Depression. We could be looking at 10 years of sub-optimal growth with more government intervention and increased risk aversion.
At the same time, this recovery is fragile. As Dan Froomkin from Harvard University's Nieman Foundation for Journalism says, there are seven potential time bombs ticking away.
1. The middle class may never be the same again with the boomers accumulating massive debt in the chase to get rich and ultimately watching their retirement incomes evaporate.
2. The recovery will take a long time.
3. It might only be temporary. Think about it. The construction industry, housing and credit bubble created all the growth that created the recovery following the tech meltdown. What will take it's place? No one's worked that one out yet.
4. We don't have the tools for recovery. Traditionally, central banks have lowered interest rates to stimulate growth following a recession. It's impossible to do that in the US when rates are close to zero. Another way is for governments to spend. They have already done that but how much more can they keep doing it.
5. Governments have created massive deficits but the real risk is cutting back spending too soon. In 1937, the Roosevelt administration did that and the economy went downhill. The only thing that saved the US was what economist Paul Krugman calls the "massive deficit-financed public works program", otherwise known as World War Two.
6. Whatever is driving the market rally could go away. How long will those forces, will be in play.
7. The Us banking sector has not yet been pulled into line and is still up to its old tricks.
Don't bet on a recovery. We're not out of the woods yet. And in any case, it will take many years before it will feel anywhere near to a real recovery.
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