Is the economic crisis that commanded so much attention over almost two years finally on the mend? The recent G20 summit at Pittsburgh, like the two earlier summits — in Washington (November 2008) and London (April 2009) — was focussed on the global economic crisis.

Since it was a financial crisis that started it all, attempts to end the twin crises will have to address concerns over banking regulation besides finding solutions to the structural problems of the global economy. These are the broad core issues engaging the attention of political leaders, central banks and international organisations such as the World Bank and the International Monetary Fund ever since it became clear that one has also to look beyond the present to find solutions that will help avoid future ones.

Global cooperation

The crisis has been a learning experience for all just as the Great Depression of the 1930s was. Being truly global, it demanded an unprecedented degree of global co-operation. And, much more of such co-operation will be needed as the global economy bottoms out and moves into a recovery phase. The immediate task of course is to see whether the global economy is finally on the mend.

Over the past few months there have been many who saw an end or at least the beginning of an end to the recession. But almost all of them did not spot signs of a robust recovery. The famous ‘green shoots’ and ‘glimmers of hope’ pronouncements attributed to the U.S. President and other senior leaders as far back as April this year suggested signs of life in what were then moribund economies. They did not indicate a recovery.

Forecasts of better times have started coming in more recently. U.S. Federal Reserve Chairman Ben Bernanke declared in mid-September that the recession had ended. That statement was received with scepticism in many quarters. It was not fully corroborated by official economic data. The persistent increase in the number of unemployed in the U.S. certainly does not suggest a rebound. But the Fed chairman had stopped short of saying that a full recovery was on. All that he mentioned was that the pace of economic contraction in the U.S. was slowing.

In any case, the major task before policy makers in every major country is not only to spot revival signs but also to nurture them. A key question — whether the synchronised stimulus packages that served their economies so well should be phased out — has for now been shelved as world leaders agreed at Pittsburg to persist with them well into the foreseeable future. More recently, Deputy Chairman of India’s Planning Commission Montek Singh Ahluwalia said that India’s stimulus packages would continue until the economy started growing by 7 per cent.

It has been left to the IMF to come out with a categorical assertion that global recovery is under way. In a recent update to its World Economic Outlook, it has stated that global economic growth has turned positive and will touch 3.1 per cent next year. The earlier forecast was for a 2.5 per cent growth.

For this year the WEO says the rate of contraction at minus 1 per cent is lower than the minus 1.4 per cent forecast earlier.

Advanced economies will expand at a sluggish pace through 2010. The estimate in their case is a modest 1.25 per cent following a contraction of 3.5 per cent in 2009. The rebound will come from the emerging and developing economies: the IMF estimates these will grow by 5 per cent in 2010, up from 1.75 per cent in 2009.

In the case of China, the projections for both 2008 and 2009 have been revised upwards by one and 0.5 percentage points to 8.5 and 9 per cent, respectively. India’s growth rates are estimated at 5.4 per cent in 2008 and 6.4 per cent in 2009. These are in line with the earlier forecasts.

Long haul ahead

Although the IMF report has made the most positive statement till date for any major institution, it is by no means an expression of unbridled optimism. If anything, the organisation is extremely cautious about growth prospects in the coming years. In a report released on September 22 (on the eve of the Pittsburgh summit) the IMF suggests that the effects of the recession will be felt long after it is technically over. The fact that this crisis had its origins in a financial sector crisis leads to the conclusion that recovery will be slow.

After studying some 80 odd banking crises over the past four decades the IMF has come to the conclusion that recessions caused by problems in the financial sector lead to output declines that are about three times as large in the medium term as those following a currency crisis.