Charismatic Barack Obama has stepped into the Presidency of the United States of America, to face some formidable tasks at home and abroad in ‘renewing’ America and ‘recreating’ its leadership as both a strong and benevolent power, in a collective pursuit of peace, security and development.

Most demanding at present is the rescue of the economy, mired in deep and lengthening recession throwing millions out of work. The new administration would have to take extra- ordinary steps to stabilise the dysfunctional banking system, which triggered the global credit crisis.

The debris left behind by one of the most unpopular US presidents, George W Bush, would take years to clear, whatever his self-trumpeted achievements. And Obama realises limits to making good his promise of ‘a better life in store for America.’ The ‘Change,’ the theme that catapulted him to the White House, as the first African-American President in over two centuries of history, will not be very visible for months to come.

With two wars on, the worst economic crisis since the Great Depression of the l930s, and a ‘planet in peril,’ Obama will have no easy time. Expectations of any dramatic shifts in the Bush era policies, whether in regard to the two wars or other current trouble spots on the world map must be put aside, even as his Secretary of State Hillary Clinton will implement his advocacy of ‘vigorous diplomacy’ with pragmatism.

There are other areas of uncertainty about the Obama administration’s likely position on a variety of issues such as on protectionism or outsourc-ing, where the new President would like to keep American jobs safe. But all focus will be on what Obama does to arrest the rapid slide in the US economy through the proposed stimulus package that’s before the Congress, designed to create or save three to four million jobs, besides cut taxes and launch programmes to kick-start the economy. Equal urgency is required to put the US financial system on a sound footing, an area where already tax-payer funds are being used to inject capital and protect banks against losses.

Global contraction

The world is now undergoing a major decline in output and trade and capital flows. Continuing fall in prices, especially steep decline in oil prices as demand slows down, is leading to deflationary threat. Major currencies and stock markets are volatile. The financial market turmoils in USA beginning 2007 gradually ballooned into a global credit crunch.

The United Nations has projected around one per cent growth for the world economy in 2009, which is subject to growth in emerging economies, whose outlook is also deteriorating rapidly. A gloomier outlook is from US economists who expect world GDP to contract by 0.4 per cent and the US economy to sink deeper by two per cent in 2009.

Recession in the US has led to factory closures, firms downsizing, sales falling and companies pausing investments, cutting jobs or trimming wages. Consumer spending declined every month and credit freeze is adding to woes of businesses and services. Capital injections in leading banks by governments in USA and Europe have led to greater state involvement in the financial sector with stakes in large numbers of private commercial banks but credit flows remain tight.

If this squeeze continues and confidence is not restored quickly, economic growth in developing countries would slow to 2.7 per cent, a dangerous level in terms of poverty reduction efforts or for maintaining social and political stability. Social unrest is already sweeping across many countries, mainly in China where millions have been thrown out of jobs from closures of factories making goods for exports. A contraction in world trade in 2009 has been projected and in the last quarter of 2008, weakening of export demand saw significant fall in exports of both developed and developing countries such as Germany, Japan, USA, China and India.

US economic scene

USA opened the New Year with more frightening prospects after the financial market meltdown in the last quarter of 2008, when growth was expected to be below the 0.5 per cent decline for the third quarter. The Fede-ral Reserve reported in January a decline in overall economic activity. Corporate defaults and bankruptcies were expected to reach the highest level in 20 years. A longer downturn was likely from the losses in stocks and housing wealth.

World stocks fell by 44 per cent in 2008 because of trading losses and investor withdrawals. Markets are generally expected to remain volatile through 2009. The DowJones lost value by 34 per cent. Retail sales, making up 70 per cent of the US growth, fell in 2008 with most retailers reporting sluggish sales even during holidays. The Fed has also projected further rise in unemployment rate over the next two years.

The Congressional Budget Office (CBO) in a December report projected a fiscal deficit of $1.2 trillion dollars in the current fiscal year ending September 2009 (against BE of $482 billion), or 8.3 per cent of GDP - the highest percentage deficit recorded since the second World War. The estimate does not include the impact of the stimulus package before Congress in January. According to CBO, the recession will last into 2009 with GDP declining by 2.2 per cent before the economy makes a modest recovery at 1.5 per cent in 2010 while unemployment rate could rise to above nine per cent in 2010.

World car sales were down in 2008 and in USAm the slowdown was partly due to credit crisis. Major US automobile firms have taken big hits from a steep fall in demand and car sales could decline further in 2009. USA, China and Brazil reported maximum fall in sales and American majors General Motors and Chrysler had to be bailed out by the Federal Government with a $17 billion loan.

Technology spending also is being lowered in view of the depressed economic outlook. Leading IT companies are cutting costs mainly through sizeable job cuts while leading banks have also announced large layoffs.

Rising unemployment

Jobs lost in USA in 2008 were 2.6 million and the unemployment rate had risen to 7.2 per cent in December from 6.8 per cent in November with 632,000 persons added to the number of unemployed, taking the national total to 11.1 million persons. While job losses are spread over manufacturing and most services, large lay-off plans have been announced by the financial sector, such as Citibank (53,000) and Bank of America (30,000) and IT leaders including HP, Dell, Sun Micro- systems, Intel and Advanced Micro Devices. Other large companies including Moto-rola, Hutchinson, Caterpillar, Conoco- Phillips and Pfizer have also annouced depressed sales and wage/job cuts.

Globally, unemployment related to economic slowdown is estimated to reach 20 million by 2010, according to the International Labour Organisation. Rising unemployment, which would total eight million in advanced countries alone, cannot be reversed until major economies like USA and Europe recover. The United Nations has called for internationally-coordinated fiscal stimulus packages that are mutually reinforcing, and aligned with sustainable development goals, in addition to
governments’ liquidity and bank recapitalisation measures.

Obama recovery plan

US Congress was debating through January an $825 billion economic stimulus package, the largest ever single expenditure programme of the Federal Government. This package has both tax-cuts and reliefs ($275 billion); new spending ($550 billion) for aid to cash-strapped states (for continuing health and other programmes); aid for unemployed, education, infrastructure; and investments in energy and science and technology.

Obama has described the package as a plan ‘to put millions back to work’ and said if Congress failed to act, another 3 to 4 million jobs would be lost over the next two years. Though there is wide support for the size of the stimulus package, concerns are voiced about the trillions of dollars of deficit that the Federal Budget would carry for years. Obama was spared the embarrassment of a failure at the start when the Senate voted to make available the remaining $350 billion out of the $700 billion financial industry bail-out package.

Democrats have been critical of the way the first $350 billion osf the rescue package for the financial sector has been administered though the US Treasury Secretary Henry Paulson had been given flexibility in using the so-called troubled asset relief program (TARP) funds. While Paulson was supposed to use the funds to buy the ‘toxic’ assets clogging the financial institutions to enable banks to resume normal operations, he later decided to recapitalise banks and other institutions in the hope that they would resume lending. But the credit crisis had not eased and nor were funds made available to help home-owners prevent foreclosures. Obama has pledged to change the way TARP had been used.

The stimulus package seeks to make good on some of the promises made during the election campaign including a tax cut for most Americans earning less than $200,000 a year.

Banking bailout

In recent months, President Bush sounded apologetic about Federal intervention in the banking system but defended the action as a temporary measure to stabilise the economy. A total of $250 billion had been used by the Treasury to invest in 10 major banks and hundreds of smaller institutions in a hope to revive the credit market. Citigroup, which was recently given a second loan to raise government infusions to $45 billion together with guarantees for its losses of over $200 billion, has reported an $8.3 billion loss in the Q4. Bank of America (BoA) reported a loss of $1.79 billion, which it attributed to the takeover of Merrill Lynch (Q4 write-down was a little over $15 billion)! BoA has received further aid of $20 billion along with guarantee against possible loss of some $118 billion in the Bank’s asset pool of securities backed by residential and commercial real estate loans as a result of its acquisition of Merrill Lynch. With its total stake rising to $45 billion, the government is now the largest shareholder in the Bank.