Recession cannot be avoided: UBS

INDIA AND GLOBAL FINANCIAL CRISIS

Troubled Swiss banking major UBS today said that “recession can no longer be avoided after the sustained losses on the equity and real estate markets and the credit crunch that is becoming increasingly entrenched”.

It suggested US economic output to contract for at least four quarters from the middle of this year, pointing that “the weakened global economic momentum and the smouldering financial market crisis has also greatly restrained European economies”.

In its latest forecast, the banking behemoth said “even in Asia, exports and economic growth — particularly in smaller open economies — have decreased noticeably”.

The Japanese economy is expected to stagnate at best in the coming year but large countries such as China, India or Indonesia should fare batter, as they have a smaller export ratio than the smaller Asian economies, UBS economists argued.

In contrast to India, China, which accounts for about 40 per cent of Asia’s economic output (excluding Japan), “has room to manoeuvre in both its fiscal and monetary policies, making it possible to counteract a decline in economic growth of well below 8 per cent”, they said.

Recently, the International Monetary Fund (IMF) had revised downwards its growth projection for India by 1.1 percentage point to 6.9 per cent in 2009.

In its latest World Economic Outlook, the IMF offered a bleak assessment on how the major drivers of the western economies as well as Japan will face hurdles to their growth in the immediate future. While the global economic growth would hover around 2.7 per cent this year, it is expected to shrink to 1.9 per cent, it said.

Though emerging economies, especially China and India, are expected to far better than the US and leading industrialised countries in Europe by staving off the worst crisis in global financial system, the two Asian countries will experience the recessionary pangs of the US and Europe, the analysts said.

Both China and India will need to adopt “contingency” measures in both monetary and fiscal fronts as attempted by several European countries over the last 48 hours, they added.

On Tuesday, Italy said it was considering a package of economic stimulus steps, while France proposed an economic government that includes creation of sovereign wealth funds to stop its big companies from being gobbled up non-European actors.

Contrary to the earlier statements by the Indian policy-makers that the country is going to be largely “decoupled” from the financial meltdown, it is now becoming increasingly clear that there would be a sharp deceleration in the economic growth, the analysts added.