What are the risks of a double dip recession to the US and German economies ?

With slower recovery, the US is feared to be heading towards a double dip recession by the end of the current year. Given the EU fiscal and monetary policies, some economists place the risk for Germany higher than for the United States.

And if the two world’s leading national economies are hit by negative economic growth, would it signal a prolonged and deeper recession for major industrial economies?

Synchronization of recessions is the norm historically. And the IMF says that Japan is experiencing its third most severe recession in the past decade. Will the United States and Europe remain immune from the contagion?

The staggered global downturn of the 1990s was the exception, not the rule, confirms an IMF report.

As it appears now, the possible recessions are likely to remain confined to industrial economies. China and India , relatively closed markets, are less affected by global downturns. The economies of Malaysia, South Korea and Thailand are showing marked improvement.

Industrial economies which are more closely linked by economic,trade and investment ties , are expected to suffer from synchronization.

To quote from an IMF report, “the speed and extent of the slowdown (in Europe) , as well as the degree of synchronisation with the United States, has taken most forecasters and policymakers by surprise. To a considerable extent, it has been due to commonality of shocks.”

Not withstanding the short-term dips and rallies, the worst possible scenario is that Americans may experience what the Japanese have gone through in the past decade, or if old historical record can be relied upon, the US may be hit by a deep depression which repeats itself in a sixty year cycle. If that happens, it would be going against the Fund’s recent data that duration of recessions is getting shorter in industrial economies thanks to human ingenuity.

And despite the rich experience gained in fighting recessions and staging recovery, “the situation in Japan which is undergoing its worst recession in the post- war period, remains a source of serious concern” to the IMF.

The “recessions and recoveries” is the core international issue as evident from title page of the World Economic Outlook April 2002 published by the International Monetary Fund. For valid reasons, the IMF report focuses on this single problem.

A variety of factors have combined that make things far more difficult to manage recovery in case of the United States. The US has been hit by recession, 9/11 and the loss of confidence of global and domestic investors in Corporate America, badly shaken by fraudulent cooking of books. Forty per cent of investments in the United States came from global investors that is now being withdrawn.

Nearly a decade of boom, much of it artificially manipulated, must inevitably be followed by a burst. The evidence is there. Sagging consumer confidence, plummeting corporate profits, sluggish capital investments and soaring budget and current account deficits do not augur a bright economic future. A weakening dollar is no longer the same store of value which it recently was.

Barring oil interests, unlike Clinton,the current US President George Bush does not represent the American multinationals with global reach. He has been thrown up by a business constituency that primarily depends on the domestic US market. Bush has, therefore, turned protectionist as indicated by the levy of duty on steel and Canadian wood and increases in farm subsidy. The world largest market economy is curbing global free trade because it’s industrial and farm products can not compete with foreign goods within its own domestic market.

Over the years, the share of the United States in the world GDP has declined from about 25 per cent 21.4 per cent.

The war on terror following 9/11 has thrown up Washington’s unilateral approach to global problems. The unilateral approach lacks consensus of allies and friends and is driving the US administration into political isolation. The US forgets that trade follows the flag.

The US recession and uncertain recovery has come after several years of corporate mergers and alliances of European and American companies to create synergies in order to improve efficiency. In the process, multinational giants have been created, inviting serious charge that they have been operating as oligopolies (few companies dominate the global market) if they are not operating as monopolies.

With profits still plummeting, the Corporate America is struggling for its own survival, consolidation and growth and is unlikely to look beyond the national frontiers for greener pastures in any substantial way.

Yet another impediment in the recovery of the US economy is shrinking business opportunities that Europe and Japan, suffering from slump, could offer through buoyant economies. In not too distant a past, industrial economies promoted sales of machinery and plants through credits offered to countries which bought their goods and services.This was followed by sharp reduction in aid to encourage multinationals to invest all around the globe. Now foreign investments and official aid tend to be scarce. It is creating an environment for independent path to national economic development in an age of globalization.

It is an era of change in which no known economic models seem to work. Asians took pride in the Japanese miracle that delivered for a time but later dissolved into thin air. The East Asian Tigers inspired the world but the 1997-98 crisis showed how vulnerable they were to global currency manipulations. In Latin America, Argentina was a show piece for the international financial institutions for a while and then it fell flat on its face. Now, it is the American model that is losing its lustre.

Of course, Asians are learning from experiences.In 5-10 years, East Asia plus three (China, Japan and South Korea) intend to create a regional trade bloc with the largest market in the world.And China pursues an independent policy which has paid rich dividends.

To quote the IMF, during 1973-2001, 21 industrial countries, picked up on the basis of data availability , were hit by 93 recessions. For the first time after World War Two, a wave of” level” recessions started, business cycles of recession and expansion. However, the long term average growth rate in industrial countries has declined since 1973, reflecting a slowdown in productivity.

The growth rate for advanced economies was 1.2 per cent in 2001 and for major advanced economies 1.1 per cent. Developing countries posted a growth of four per cent against the world’s output growth of 2.5 per cent. Japan’s growth was a negative 0.4 per cent and Germany ended up by 0.6 per cent against USA’s 1.1 per cent. After closer scrutiny, often US performance figures are revised downwards.

Synchronisation became the norm in case of global downturn as global linkages in trade and asset markets after the World War II increased. In recent decades, according to the IMF, investment contractions have been more synchronised across countries than have the recessions. And virtually, all recessions in recent decades have been accompanied by contraction in fixed investment. The recession in the United States has been investment- led.

But according to the IMF, recoveries do not have to wait for a turnaround in investment. They typically start with a pick up in consumption and inventories. Only time will tell how things turn out to be in a fast-changing world.