Risk, hope beneath calmer global economy

WASHINGTON -- Despite weak growth prospects, the global economy is now less turbulent than several years ago, and the spillover effects of US fiscal and monetary policies are affecting emerging economies, a leading World Bank economist said.

The economy of emerging countries will experience a slowdown in the next one or two years before picking up, Kaushik Basu, chief economist and senior vice president at the World Bank, said in a recent exclusive interview with Xinhua.

Calmer world economy

"Overall, the global economy has been calmer, but we must not read into the calmness that problems are solved," Basu said.

Unlike in the previous years, there is no outbreak of financial crisis this year, he said. "On the surface, things are calm. The eurozone area now is collectively out of the recession. But beneath the calmness, there are lots of worrying signals and we have to keep that in mind."

Although the eurozone has come out of the recession, at least five countries in the currency bloc are experiencing economic contraction. Real wage rates in countries with poor economic performance like Greece, Portugal and Spain are on the wane.

Basu said that policymakers in the eurozone know that several structural reforms are in need, including a banking union and a collective resolution scheme for banks.

The chief economist noted that emerging economies including China, India and Brazil were doing relatively well until almost a year ago, but many of them are slowing down sharply.

Problems facing the global economy are not over, and the world may have a "very difficult time" in the coming year with some risks on the horizon, he said.

The US is the world's largest economy. Its fiscal and monetary policies will not only affect its own economic performance, but also have global implications.

"There will be fiscal uncertainties. We are seeing a huge one in the United States and coping with that is the big question," he said, referring to the Oct 17 deadline for raising the US debt ceiling.

Washington faces a fiscal deadline as US Treasury Secretary Jacob Lew has told Congress that the federal government will reach its debt ceiling of $16.7 trillion by Oct 17, and failure to raise it would lead to a catastrophic default.

However, Democrats and Republicans have not found a path to end the fiscal logjam amid the partial government shutdown.

If the US government's debt ceiling cannot be raised and there is a default, it will be a piece of "very major negative news for the world," Basu stressed, adding that he believes the United States will solve the challenge before Oct 17.

Basu also noted the United States is treated as the best channel of stability for the world, and investors' money usually flow into US Treasury bonds when crises are happening anywhere in the world.