Global recovery on its way, say world bankers

Mull ways of unwinding emergency measures put in place earlier

“The prospects for a return to growth in the near term appear good,” declared US Federal Reserve Chairman  Ben S Bernanke, offering optimism both about the US and the worldwide outlook.

Though the Fed chairman repeated his warning that the economic recovery here was likely to be slow and arduous and that unemployment would remain high for another year, he went beyond the central bank’s most recent statement that economic activity was ‘leveling out’.

Some officials say the shift to tighter monetary policies and higher interest rates, though unlikely to start until at least the middle of next year, may have to be much more abrupt than normal if they are to prevent inflation.

Speaking to central bankers and economists at the Fed’s annual retreat here in the Grand Tetons, Bernanke echoed the growing relief among European and Asian central bankers that their own economies had already started to rebound.

Even as they indulged in a bit of self-congratulation over what had been achieved since the financial crisis of last year, these central bankers were beginning to focus quietly on another big task, how they will unwind the vast emergency measures they put in place to fight the crisis.

Relief & confidence

The mood of relief and cautious confidence among central bankers and economists was almost palpable — a stark contrast to the anxiety and tension that permeated their retreat here one year ago. “It is reasonable to declare that the worst of the crisis is behind us, and that the first signs of global growth have appeared earlier than we generally expected nine months ago,” said Bank of Israel Governor Stanley Fischer — a top former official at the International Monetary Fund (IMF).

In the past week, France and Germany both surprised forecasters by reporting positive growth after a string of quarterly contractions. Japan followed with its own growth report. The Fed and other central banks will have to unwind a number of emergency measures deployed during the peak of the crisis as growth returns. A growing number of economists and some Fed officials say the shift to tighter monetary policies and higher interest rates, though unlikely to start until at least the middle of next year, may have to be much more abrupt than normal if they are to prevent inflation two or three years from now. “When you get into a crisis like this, gradualism is not the right strategy,” said Frederic S Mishkin, an economist at Columbia University who was a Fed Governor from 2006 until 2008, adding that of course, when things turn around, you have to be aggressive in the other direction.

Aggressive action

Assessing the extraordinary events of the last year, Bernanke argued that aggressive action by countries around the world prevented a collapse that would have been even worse than what actually took place.

Asserting that short-term lending markets are functioning more normally, that corporate bond issuance is strong and that other ‘previously moribund’ securitisation markets are reviving, Bernanke said that both the US and other major countries were poised for growth. In emphasising not just an imminent end to the recession but also good chances for actual growth, Bernanke’s assessment was in some ways surprising.