Full recovery to take two years or more: Expert

Nobel Prize-winning economist Paul Krugman says worst is over, but world economy still needs second stimulus

KUALA LUMPUR: Aggressive stimulus spending by governments helped the world avoid a second Great Depression, but full economic recovery will take two years or more, Nobel Prize-winning economist Paul Krugman said yesterday.

He added that the worst of the global crisis was over, with economic and exports growth showing signs of stabilisation.

Still, recovery is likely to be 'disappointing' as government spending is not sustainable in the long run and the unemployment rate is still lagging behind, he told a two-day World Capital Markets Symposium yesterday in Kuala Lumpur.

There is not likely to be any 'Phoenix-like' recovery, such as in the 1997-98 Asian financial crisis when economies expanded dramatically, led by a sharp rebound in exports, he said.

'We have managed to avoid a second Great Depression...but full recovery is at least two years and probably more,' Mr Krugman said. Asia is likely to see a faster rebound than the United States and Europe, partly driven by recovery in manufacturing exports, he added.

Mr Krugman said there was still room for the US government to increase spending to boost growth, despite concerns over its swollen budget deficit.

In an interview with CNBC in Kuala Lumpur yesterday, he added that the world economy needs a second stimulus if it is to avoid the fate of Japan in the 1990s, when the country was stuck with years of sluggish growth.

The US Labour Department last Friday showed that the jobless rate in the world's largest economy dipped for the first time in 15 months, while workers' hours and pay edged upwards.

It said a net total of 247,000 jobs were lost last month, the fewest in a year and a drastic improvement from the 443,000 jobs that vanished in June.

But it is hard to pinpoint the sources of future growth as the financial crisis has left the world with excess capacity and the possibility of high unemployment everywhere, according to Mr Krugman.

He said: 'Right now, I think the world as a whole kind of looks like Japan in the early 90s. Not a catastrophe, but we really don't know how we get serious growth going. Actually, the slump globally has been much worse than anything Japan had during that lost decade.'

More stimulus money is key for a sustainable recovery as fears of inflation are overdone, Mr Krugman told CNBC.

'We really should have a second stimulus,' he said, dismissing fears of price rises as a result of too much cash in the system.

ASSOCIATED PRESS

Source: Straits Times, 11 Aug 2009