World economy stabilising says Krugman

Mon May 25, 2009 7:54am EDT

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ABU DHABI May 25 (Reuters) - The world economy has avoided "utter catastrophe" and industrialised countries could register growth this year, Nobel Prize-winning economist Paul Krugman said on Monday.

"I will not be surprised to see world trade stabilise, world industrial production stabilise and start to grow two months from now," Krugman told a seminar.

"I would not be surprised to see flat to positive GDP growth in the United States, and maybe even in Europe, in the second half of the year."

The Princeton professor and New York Times columnist has said he fears a decade-long slump like that experienced by Japan in the 1990s.

He has criticised the U.S. administration's bailout plan to persuade investors to help rid banks of up to $1 trillion in toxic assets as amounting to subsidised purchases of bad assets.

Speaking in UAE, the world's third-largest oil exporter, Krugman said Japan's solution of export-led growth would not work because the downturn has been global.

"In some sense we may be past the worst but there is a big difference between stabilising and actually making up the lost ground," he said.

"We have averted utter catastrophe, but how do we get real recovery?

"We can't all export our way to recovery. There's no other planet to trade with. So the road Japan took is not available to us all," Krugman said.

Global recovery could come about through more investment by major corporations, the emergence of a major technological innovation to match the IT revolution of the 1990s or government moves on climate change.

"Legislation that will establish a capping grade system for greenhouse gases' emissions is moving forward," he said, referring to the U.S. Congress.

"When the Europeans probably follow suit, and the Japanese, and negotiations begin with developing countries to work them into the system, that will provide enormous incentive for businesses to start investing and prepare for the new regime on emissions... But that's a hope, that's not a certainty." (Reporting by Andrew Hammond; editing by Thomas Atkins and Robert Woodward)

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