Global economy won't recover soon: Stephen King

Editor's note: The G-20 summit is over but disputes over the global economy and reforming the sovereign reserve currency system persist. China Daily reporter Hu Yuanyuan interviewed Stephen King, group chief economist of HSBC at London on these issues.

Q: Some forecasts suggest that global economic activity will stabilize in the second half of the year. Do you agree?

A: I don't expect an immediate return to business as usual since such activity would stabilize at a low level. It could take quite a while to return to where the global economy was two or three years ago.

The global economy will still shrink in 2009. This, in fact, is the first global contraction we have seen since the 1930s, which was also a contraction that had its origins in a financial crisis.

The crisis is not about the credit crunch. It is also a story of a severe loss of confident among households and companies, who are not so sure what the future holds for them. They therefore have to cut back on their spending.

Even if the banks wanted to give loans, an increasing number of people don't want to borrow. So, there are actually two problems now, lack of lending and also lack of borrowing. And the two, put together, create the significant dip in economic activity that we have seen in recent month.

It is important to stress that even if the interest rate is zero, there are others thing central banks can do, such as buying up assets, to try to pump additional money into economy.

Unfortunately, I think it is still difficult to tell what the effect of such policies would be. They certainly would cushion the down swing but they might not necessarily spark a strong recovery in the global economy.

Q: So what are the major constraints on economic recovery at this moment?

A: One constraint is that a financial crisis tends to last for a long period, sometimes more than three or four years.

The ability of the economy to recover during this period is limited. Economic stabilization is probably the best thing the world can hope for until the financial crisis passes.

Another constraint is that the public doesn't really understand how quantitative easing works, therefore, central banks that do it need to think carefully how to explain what result they expect from such policies (in economics, 'quantitative easing' means that when the interest rate is at or near zero, the central bank continues to inject money to increase market liquidity. The central banks of Japan and the UK have already adopted the policy to help bolster their national economies). The public needs to understand the policy if it is to have maximum benefit.

Another difficulty is the tremendous increase in household debt over the last few years. Even if government policy can help stabilize national economies, households will probably still have too much debt and the public's desire to save in order to pay back this debt will act as a brake on the pace of economic growth for the next two or three years.

The good news here is that I think government policies can help stabilize the situation, which is otherwise grim.

The bad news is that, even with stabilization, we need quite a while to return to the conditions that the global economy enjoyed two or three years ago.

Q: China's central bank governor Zhou Xiaochuan recently proposed creating a new "super sovereign reserve currency" to replace the US dollar. What do you think of it?

A: As I understand, the suggestion is to replace dollars with SDR (Special Drawing Rights), and SDR is heavily weighted towards dollars. So, in that sense, it is not such a big move away from the current situation.

The history of global reserve currencies is ultimately that each currency tends to stay as the reserve currency as long as people around the world are happy to hold it as a reserve currency.

A reserve currency declines when the country issuing the currency abuses its position in some sense or becomes weaker over time, economically or militarily, or something along that line. It is not so much that a new wonderful currency comes along suddenly, it is that the existing reserve currency lose some of its quality as a reserve currency.

The US has been running a large current account deficit for years, funded by the willingness of other countries to hold US dollars. The benefit for these holding countries is they have been growing much more quickly.

In that sense, they are catching up with the economic power that the US currently enjoys. The situation will continue for many years and, ultimately, maybe in 50 years, countries such as China and India may catch up with the US and become economic rivals.

I don't think you can simply and easily announce a change of reserve currency, since that's the choice of billions of people around the world. Such a change will take decades.

(China Daily 04/13/2009 page4)