World Economic Forum forecasts another recession

The World Economic Forum is predicting a second recession resulting from huge government fiscal deficits brought about by stimulus packages to cushion economies from the free fall and a slowdown in consumption.

In its latest publication titled Global Risks 2010: A Global Risk Network Report , the World Economic Forum (WEF) indicates that a second bout of recession was also likely because of underinvestment in infrastructure and high level of unemployment.

Global economies

The interconnectivity of global economies will drive the slowdown as a likelihood of a further dip in one economy will invariably affect other economies directly or indirectly.

“What has changed dramatically is the level of recognition that global risks, like the world, are now tightly interconnected and shocks and vulnerabilities are truly global, even if impact and response can still differ at the “local” level”, said Klaus Schwab the Founder and Executive Chairman of World Economic Forum.

The World Economic Forum which was set up five years ago brings together political leaders of major economies, top business executives and other influential persons to debate the global economy. This year’s four day meeting started on Wednesday in Davos, Switzerland.

The report, which in previous years had been among the first to cite the prospect of a financial crisis, the oil crisis that preceded it and the ongoing food crisis, included a list of growing risks threatening leading economies.

Among the most likely, and potentially most costly, is a sovereign debt crisis, as some countries struggle to afford the unprecedented costs of the crisis clean-up which might set off a inflationary spiral melt down pulling the economies further back into recession.

The report notes that after the shock to the global financial system and world economy in 2008, last year was one of appraisal and adjustment.

According to local economists, though Kenya may be immune to the direct happenstance at the global level, the aftershock is likely to bear heavily on the economy.

“The local economy is relatively immune to the global economy but a slow down in consumption in the West will affect it in terms of declining foreign exchange earnings from key exports of tea, coffee, horticulture, declining remittances, disinterest from foreign investors and ability of the government to access funds”, said Judd Murigi, Head of Research at CFC-Stanbic Financial Services.

In its latest quarterly Economic and Market Outlook, CFC-Stanbic Financial Services predict a continued risk of double dip recession as many economies continue to struggle with diverse risks related to ending global monetary and fiscal stimulus.

The key sectors likely to feel the heat of a global slowdown will be imports as costs will rise, leading to huge import bill. A huge import bill will lead to a growing deficit on the balance of payment affecting the ability of the economy to attract the much needed foreign investment.

“A favourable balance of trade is normally preferred as it points to an economy that has more export business hence attractive to investors while an economy with a ballooning trade deficit regime indicates a high cost destination as businesses have to contend with importing production input which raises their cost of operation” said Dr Samuel Nyandemo, an economic lecturer at the University of Nairobi in an earlier interview.

Similarly, a fall in consumption by the Western world will result in a decline in tourists affecting the local tourism sector.