Michael Spence signals slow economic recovery

The signs of recovery are beginning to show up across the globe, but experts and market participants are still divided on the pace and nature of the recovery. So, will we see a quick turnaround or are there more roadblocks ahead?

Michael Spence, 2001 Economics Nobel Laureate said, the world would have to be prepared for a slow economic recovery and growth would take time.

Here is a verbatim transcript of the exclusive interview with Michael Spence on CNBC-TV18. Also watch the accompanying video.

Q: The current global thinking on the economy is that we are seeing green shoots. What is your take on that?

A: I don’t believe that we’re going to have an easy time in the recovery. I expect growth to be slow and unemployment high in the advance countries for at least the next 18-months.

Q: Governments across the world are pumping in so much money. The fiscal deficits are going to rise. How do you see inflation numbers panning out?

A: The most likely outcome is that governments will rein in the deficits once we are past the need for them and that process will actually produce some slowing of growth. The alternative is that don’t rein in the deficits and then we get spikes in interest rates, rising inflation and so on. That’s less likely but it is possible.

Q: Analysts are saying China is seeing a bubble in equity markets that is likely to burst. What is your take?

A: I am not sure that it is a bubble yet but there is a lot of very low price credit available in the Chinese economy and they are certainly going to have to watch it.

Q: What's your view on the commodities – oil particularly? Do you expect that to sort of create another surge of inflationary situation and therefore create another bubble?

A: I am not an expert on oil prices but I think the most likely outcome is we will see a steady rise. But nothing like the spike that we saw in the pre-crisis period when oil got upto USD 150 per barrel. But with global demand rising again I think the price of oil will start to rise and probably on balance that’s a good thing.

Q: You were talking about energy subsidies – we are very far away from full cost pricing. Do you think it is time now that the government started administering prices which showed economic value?

A: I do. It is important at least to reflect the full sort of cost of the product because the alternative is you create very powerful incentives to make bad investments – in energy inefficient houses and not only are they bad investments but they last a long time. It is very hard to fix it once that happens, so I think it is very important to get energy pricing at least full economic cost.

Q: Everyone is talking about a V-shaped recovery. How do you see the global economy heading out of this slowdown?

A: There is likely to be a reasonably good recovery – already well in evidence in many of the major developing countries including India, China and Brazil. The rising price of some of the commodities will help a number of economies without doing terrible damage in other places and the developed economies have a major problem fixing of financial system and they are likely to be in for a period of slower growth than we were used to pre-crisis.