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Print Edition> Business
UPDATED: July 26, 2010 NO. 30 JULY 29, 2010
Crisis Focus: The 'Double Dip' Terror?

Fears over a "double dip" recession of the world economy have become more abundant recently, but the scare is not unfounded—certain economic risks may be inevitable. But what are these risks? And where is the world economy heading in the second half of this year? The latest Standard Chartered Global Focus, a monthly analysis of economic and financial market developments by Standard Chartered Bank, provided answers to these questions. Edited excerpts follow:

An economic correction of some sort in the second half of this year was always likely. This will be a sub-trend recovery, unlike a normal one, where momentum and confidence gather pace as the recovery gets going. So far, the global recovery has been heavily driven by policy stimulus; thus, as the policy boost of the last year wears off, a moderation in growth can be expected.

A number of factors are combining to add to the present economic and financial market uncertainty. In addition to the fading impact of previous stimulus plans, there is the realization that the policymaking focus has made a U-turn in some parts of the world, as seen at the recent G20.

The United States has not shifted its policy, and has urged other countries to keep their fiscal policies relatively loose. It is primarily Europe that has shifted its thinking, largely as a reaction to events in Greece. Moreover, the G20 endorsed the decision of some countries to tighten fiscal policies significantly. Premature policy tightening—a factor that could trigger a "double dip" recession—has recently become a very high risk.

We have often stressed that the outlook depends on the interaction between the fundamentals, policy and confidence. The biggest recent shift has been in policy. With confidence being a key factor in any recovery, the danger exists that any sign of the world economy losing momentum may dampen consumption and deter investment.

Even though the world economy is moving into the second half of 2010 in a recovery phase, there is a big difference relative to how recoveries normally function. Momentum, which would normally be expected to kick in now with rising confidence, is fading, not building.

This focuses attention on the emerging world, specifically in Asia. But challenges are more complex in the East, where countries have to contend with both a potential export slowdown, and inflation worries associated with excess inflows and rapid domestic monetary growth.

The key, perhaps, is China. Yet fine-tuning the Chinese economy will not be easy. China's economy benefited from a ramping-up of lending, but it is slowing, as policy is tightened. Confidence has also been hit by the combination of domestic tightening and the slowdown in Europe, China's biggest export market.

Despite all this, China still had the confidence to proceed with the gradual but significant shift in currency policy.

For the world economy to rebalance, we need to see greater currency flexibility, a move to higher savings in the West, and a shift to increased consumption by the countries that have traditionally been staunch savers. It is this increase that we really need to see, on a bigger scale, in order to rule out the much-feared "double dip."

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