The International Monetary Fund’s July World Economic Outlook report portrays the world economy shrinking in 2009 by 1.4% and growing though not strongly at 2.5% in 2010. This both reflects and buttresses a widely held view that at global level and in some countries and regions, the end of the worst of the recession is occurring or is in sight but that recovery will not be strong or quick enough to take this year’s overall economic results into the realm of growth. Moreover, some of the sharp variations in IMF projections from one quarter to the next, on which I commented in my 24 April post, have flattened out and there seems greater to be greater consistency, confidence and certainty than before. But underneath, a plethora of uncertainties remain.
As the IMF economists’ projections of economic performance in 2009 begin to settle down, partly just because of the passage of time, it is tempting to adhere to the emerging consensus. Pass your eye across and down the overview table of economic projections and a clear pattern emerges:
- the world economy as a whole is projected to shrink this year, then grow weakly in 2010;
- the advanced economies as a whole (a.k .a. rich countries) are expected to shrink by more in 2009 (3.8% down compared to the world.s 1.4) and grow even more weakly (0.6% growth while the world as a whole is expected to see 2.5);
- in emerging and developing economies, economic growth is projected to fall from 8.3% in 2007 and 6% in 2008 to 1.5% this year and 4.7% next;
- within this, growth in Africa is seen as falling 6.5% in 2007 and 5.2% in 2008, to just 1.8% this year and 4.1% next year.
- China’s growth is expected to drop from 13% in 2007 and 9% in 2008 to just 7.5 in 2009, inching up to 8 in 2010, and the projections for India show a similar pattern: down from 9.4% and 7.3 in 2007 and 2008 respectively to 5.4 this year and 6.5 next.
In emerging and developing economies, reduced growth is at least as serious in its human and social impact as actual economic contraction in richer countries and in most cases its effects are far, far worse both because the starting point is so much lower and closer to bare survival levels, and because the population is growing.
With variations, the projections for richer countries indicate a U-shaped slump rather than V-shaped. That is, the sharpness of the decline is generally not expected to be matched by a sharp recovery. Among the major economies, the US looks like a relatively strong performer, projected to be shrinking by 2.6% in this year compared to the Euro-zone’s anticipated 4.8% shrinkage, and recovering in 2010 with growth of 0.8% while all the IMF expects for the Eurozone is slower decline with a continuing shrinkage of 0.3%. Inside the Eurozone Germany comes out weakly with 6.2% contraction this year and 0.6 next, while outside the UK limps along at a projected 4.2% shrinkage this year and a barely visible growth of 0.2% in 2010.
This pattern is reflected by business surveys in the UK that indicate that the recession has bitten extremely deeply but the worst of it is over,(see last week’s Economist).
I find myself wondering whether this pattern is all a little too neat. Everywhere, it seems, we go down albeit at different speeds, and everywhere next year we start to go up again or, at least, go down much more slowly. Of course, it’s a globalised world but are national economies really that integrated with each other? I start to wonder whether this isn’t simply a commonsense assumption – economic recession will not last forever and recovery will start some time – turned into figures. I begin to wonder whether rich countries like Japan, the UK and the US that most actively embraced stimulus packages are being favoured in these estimates because they express and implement the current consensus, which is that active policy measures that include radically reducing interest rates and aggressively stimulating the economy are the right way to go. Since these figures are projections rather than factual data, how much do they owe to ideology.
Now, let me stress one thing: to my transparently limited understanding of economics, cutting interest rates and investing in the economic future through state-funded investment and spending programmes (i.e., stimulus packages) are the right way to go. Faced with the catastrophic collapse in credit availability, consumer confidence, commerce and manufacturing in the last three months of 2008, it seemed and seems to me that tight monetary policy and cutting public spending in order to balance the books would turn catastrophe into whatever is worse than that. So, make no mistake, I go along with the pro-stimulus consensus and accordingly I would like to think that events will bear out the merit of that policy.
But I recognise that this is a big and important area of debate and even if I hold trenchant views I think it’s important that the debate is based on evidence as completely as possible. And I can’t help it: when the figures give patterns that are that neat, and when the key figures are all projections, I start to think there might be a smell and it might be a tad fishy.
Disturbing the consensus
Right on time, to disturb the stimulus consensus, take a look at the argument in the US about whether the Obama administration’s $787 billion stimulus package: whether it’s worked (unemployment has continued to rise), whether it’s been used (almost 90% of the money has not been spent yet), and thus whether it will work if given time, and whether a second stimulus package might be needed (Warren Buffet thinks so and Paul Krugman seems to think so too). The CBS news blog recently carried a good summary of issues and arguments.
It’s worth going into these arguments because, over and above everything else, what they show is that we still do not know when and how this recession ends. Uncertainty still prevails and the IMF projections, for all that they are worked over carefully by highly qualified economists, remain a reflection of a way of seeing things, and not necessarily a straightforward presentation of the way things are and will be.
And just in case that is not enough uncertainty, a brief article by President Clinton’s Labor Secretary Robert Reich argues that we should stop talking about recovery because the old economy, based on credit, cannot recover. What will happen instead, he argues, is that a new economy will be built.