The global economy would get the risk of a double dip or a long period of relatively weak growth if the life-support stimulus is withdrawn too soon, said Stephen King, chief economist of HSBC.

Keep Stimulus in Place

The economist said in a recent interview with Xinhua that stimulus policies should be kept relatively loose for quite a long period of time, which is an important thing to ensure a sustainable recovery and growth of the global economy.

"The other thing that you should not be doing is pushing towards a more protectionist world," he said, "The primary reason why we are seeing unemployment rising in the West is because of failures within the West itself."

Thus, he said that the key things are not tightening policy too early and at the same time making sure that we tried to commit as much as possible to opening the trading regime.

He forecast that the economic growth for Western nations including Japan in 2010 is about 1.75 percent. For the emerging world, the growth would be about 6 percent.

"The differences between the developed and the emerging worlds are partly that the pace of recovery is better in emerging world's and the emerging nations have grown much more quickly than the developed nations," said King.

The obvious reason for that is that emerging nations have plenty of cash to do, income per capita is still quite depressed, he added. Even in China where there's been tremendous growth over the past 20 or 30 years, income per capita averaged about US$2000-3000, compared with about US$40,000 in the United States.

"The potential to catch up is still very powerful," he said.

As for the world trade, King said that trading activity has clearly improved over the past few months. "We're certainly not back to the position where we were two or three years ago the least we're going the right way and not the wrong way," he said.

"Increasingly trade is taking place within the emerging world which is really quite a substantial change over the past, " he said, "The idea that the US consumer is the consumer of the world is beginning to change and we're seeing increasing evidence that there is much more trade within the emerging nations and between the emerging nations."

He emphasized that emerging nations now have a larger share of the global GDP than they did a few years back. "It is clearly now that the contribution from the emerging world is bigger than from many parts of the developed world."

Uncertainty Remains

King said that though there has been a recovery over the past few months, the situation still looks terribly difficult and there are still some considerable challenges ahead.

The first of these is that the United States and the UK and parts of Europe still have tremendously high levels of debt, both household debt and government debt, according to King.

He said the consequence of dealing with the crisis was that the government budgetary positions got a lot worse in a relatively short space of time, which means they would come up of tax increases and cutbacks in public spending, consumers trying to repay debt.

"This suggests that the pace of recovery in 2010 and beyond in the Western world will be really quite difficult," he said, "Growth would be very soft for quite a long period of time."

The second is that the current recovery and growth so far has been partly the result of some very short-term specific policies in the US and also the same in Europe. These stimulus policies temporarily increase consumer spending, but it does not necessarily mean that it will be sustained in a year or two.

"Western economies are still like a very sick patients and are being kept alive with special drugs," said the economist.

In this particular case, the special drugs are very low interest rates, the so-called unconventional quantitative easing policy, and the fiscal stimulus policy.

"The question that nobody is really sure the answer to this stage is to what extent are these economies able to recover without this sort of life-support," he said, "So this is a big uncertainty over the next two or three years."

He said the success of the United States and the UK in the past depended very much on housing bubbles and increases in household debt, none of which is really sustainable in the long term. The success also depended on various spending conditions by banks which are not likely to continue into the long-term.

"The consequence of these two things is that we may find that the pace of growth, not just next year but over the next five or 10 years will be really quite disappointing compared to the growth we've seen in the past," he added.

(Xinhua News Agency December 1, 2009)