Balancing the short term with the long term has never been easy, and during a time marked by significant uncertainty in global financial markets, it just got harder. Organizations worldwide are searching for signs of stability, while weighing the risks of pursuing new opportunities against cautious steps that recognize continued economic fragility. All the while, government officials and economic leaders remain unusually divided regarding which policy approaches will be most effective for maintaining a steady course toward full economic recovery.

Two economists, Sung Won Sohn from Californian State University, Channel Islands and Linda Yeuh from Oxford University, discussed these issues today in a panel at the Premier Business Leadership Series.

In the panel titled, "The global economic outlook: Assessing new risks and stepping toward recovery," Sung and Linda addressed some of the big economic issues of the day.

What are the prospects for the US economy?
It is Linda Yeuh’s view that that US growth will be slow – 2 percent rather than a strong bounce back. But this is not a normal recession that United States is coming out of and we should not expect the deep fall followed by the steep climb. The current economic climate is more similar to the Great Depression – when there was also a financial crisis – than more recent recessions. In both the opinion of Lind and Sung Won, there is a diminishing likelihood of a double dip recession for the United States. That said, Sung is more concerned about the United States facing a "lost decade" of low growth and an economy “stuck in neutral.”

According to Linda, turbulent times of slow growth worry people, and this contributes to low levels of confidence in the economy (because of problems in housing market, unemployment, etc). In turn, economic inactivity is worrying policy makers and their view is that the economy needs another boost. The question then is this: "do you accept slow growth, which is normal, for possibly another seven to ten years? Or do you continue with intervention in the hope that short term measures can be balanced by future benefits?" Linda reminds us: The United States hasn’t faced a crisis at this level in 80 years.

Could the United States end up like Japan with years of economic underperformance, despite massive stimulus investment?
Linda Yeuh thinks that there is a risk of that. Prices aren’t moving, firms are hoarding cash, banks are repairing balance sheets, households aren’t spending. All of this contributes to strong deflationary pressures – and all are similar to what happened in Japan.

US Fed Chairman Ben Bernanke is looking to generate moderate inflation now (by injecting money into the economy). The hope is to convince people, firms and markets to spend and that there is not going to be inflation in the long term. The Fed also has to convince people that it’s a controlled policy. Sung Won expressed his concern that the Fed will need to stay proactively engaged in steering the US economy through a long-term balancing act of stimulating economic activity whilst not storing up inflationary problems for the future. He was also concerned that there are few fiscal policy tools left in the box; no stimulus program can be sustained indefinitely.

Can actions by government really change the direction of the US economy?
In the current environment, what policy makers do affects confidence. What we need are for businesses to invest, and they don’t invest unless they feel confident. The US administration has the goal of doubling exports in five years, but the government can’t make that happen; it will be down to business and markets, and that is hard when every country in the world is trying to recover by export-led-growth. As Linda said, “Unless we can export to Mars, there’s going to be a limit to this strategy for the United States.” Attempts to stimulate exports through controlling the value of the dollar could also lead to a global currency / trade war, which would be terrible for the global economy, but it’s not only the United States that is engaged in this strategy.

However, according to Linda, China is poised to let its currency appreciate and reorient its economy towards domestic demand. They want stability. With 20 million people out of work in China and inflation on their horizon, they’ve raised rates, but need to allow currency to appreciate. Their worry is: Can they do it fast enough to soothe political tensions – and to help their own economy? China is desperate to keep down inflation. They may even agree to Secretary of the Treasury Tim Geitner’s caps, which would be revolutionary.

Sung Won believes that China has to deregulate and open up its markets to stimulate domestic demand and also allow the markets to invest inbound investment more effectively. But China has an aging population, and its dependence upon manufacturing may place them at a long term disadvantage compared to, say, India which is building more of its growth on services. In Sung Won's view, sustained growth requires a market democracy - which does a much better job of reallocating resources.

What are your views on the European economy?
Both panelists expressed their concerns about the pressing issue in Europe - is the single currency going to survive? Linda Yeuh believes that Greece may default within three years. Greece, Ireland and possibly Portugal are the problem economies in Europe, she says. Greece is being bailed out – Germany is borrowing money to lend to Greece yet they have their own deficit to deal with.

Sung Won believes that history will deem the Euro a failure. He says it is not an "optimal currency" and it is currently constraining fiscal policy and does not allow the market to self-correct. For example, the high value of the Euro currently makes it difficult for Greece to export, which it desperately needs to do to address its debt burden. In Linda"s view, the Euro has about three years to figure out its structural problems but she remains optimistic (for an economist) that the challenges will be met.

Is it likely for Euro to break up?
Linda doesn’t think it will, though it might disintegrate at the edges. The problem is that have different countries with different economies all using the same currency. When times are good, the single currency is good for the smaller countries but when times are bad, they think, “I wish we had our own cheap currency back….”

What about India?
India has a great deal of potential. It has almost the same population as China. Both far outstrip other countries in terms of population. So, why hasn’t India grown more before now? Partly because of regulation. Since independence, India has had an average growth rate of 6 percent and has only turned the corner is last ten years. It is predicted to hit double digit growth in next few years (and was at 8 percent last quarter). However, India still has two thirds of its population in poverty and this is also moving in wrong direction. For example, job creation is still too low and the income gap is widening. India hasn’t expanded as quickly because of the continuing dominance of the agricultural sector and its effect on GDP. India’s IT industry only employs 1 million people and that is a very small percentage of its population, but if India can get job creation moving, they have great potential.

Africa?
Linda is reserving judgment about the short-term economic future of Africa; they’ve had strong growth rates through the recession, but have also had many African nations that needed bailing out. According to her, the reason they’re so volatile is that the countries that are growing well have benefited from a commodity price boom; Africa is experiencing strong commodity exports, which also causes strong growth. There is no guarantee that the commodity boom will continue. Sung Won pointed out that much of Africa still lacks the basic infrastructure on which to build a domestic industrial base and remains at the mercy of political instability and conflict.

What is in store for the immediate Future?
Next week is huge. The Fed is to decide if it’s going to pump more cash into the economy (looks like they will, which implies an ongoing dollar weakness). The European Central Bank (ECB) and the Bank of England are facing a similar decision and have a three-way split on their committees.

The following week the G20 meets to figure out global policy. They have to decide if the causes of global imbalances (deficits in the United States and surpluses in other countries) are a result of currency policies (savings behavior) or if they are structural. The answer is both, which is very unsatisfying. In addition to which, the G20 really needs to get to grips with international governance policy, says Linda.

Finally, this question from the floor: shouldn’t we be doing something to stimulate consumer spending, rather than having consumers pay more taxes?
In most economies, consumer spending is 50-66 percent of GDP. In the United States it was 70 percent, which was too high. The bigger problem is that it was all borrowed money. As people repay debt, consumer demand will be weak. The hardest part for the United States is that after the crisis, there is no way to speed up the deleveraging process. The Fed can help by making it cheaper to repay debt, but growth will remain subdued. The solution has to be consumer spending, but it has to be based on something other than borrowing.