April 16, 2009, 6:58 am Where Is the Global Economy Heading?<http://economix.blogs.nytimes.com/2009/04/16/where-is-the-global-economy-heading/> By Simon Johnson <http://mail.google.com/author/simon-johnson/>
*Simon Johnson<http://www.nytimes.com/2009/04/03/business/economy/simonjohnson.ready.html>, a professor of entrepreneurship at M.I.T.’s Sloan School of Management, is the former chief economist at the International Monetary Fund.* On April 22, the International Monetary Fund will release its revised growth forecast for the world economy. This forecast, the World Economic Outlook, attracts attention because the I.M.F. has a unique global perspective as the only macroeconomy-focused organization to which almost all countries belong. But the document is most important for what it tells us about the current thinking of government officials in major economies and about the likely future direction of their policies. The forecast is a “bottom up” aggregation of macroeconomic views on specific countries, put together in a mutually consistent manner by experienced economists. It is also an intensely political document affected by many negotiations, large and small. The biggest global divide may seem obvious. The European Central Bank, which runs the euro zone, feels that recovery is just around the corner and — as a result — that inflation risks are very real and policy should be cautious; influential continental European governments, particularly Germany, are quite strident on this point. Ben Bernanke and the Federal Reserve, in contrast, stress the dangers<http://www.washingtonpost.com/wp-dyn/content/article/2009/04/02/AR2009040202573.html>of falling into a depression, and American policy more broadly is very much about further stimulating the economy. Two weeks ago, at the G-20 summit meeting<http://topics.nytimes.com/topics/reference/timestopics/organizations/g/group_of_20/index.html>, there was something of a standoff between the Europeans (“we’ve done a lot”) and the Americans (“we need to do more”). On April 25, there’s a rematch – a meeting of the world’s finance ministers and central bankers in Washington — and the I.M.F.’s forecast is both a key input into that meeting and a signal of the policies that will emerge. Of late, the “it’s not so bad” view has taken a beating, as seen in the rapidly falling forecasts issued by the I.M.F. In its late January 2009 update<http://www.imf.org/external/pubs/ft/weo/2009/update/01/index.htm>, the I.M.F. marked down its “year over year” world growth estimate to 0.5 percent for this year and to 3.0 percent for 2010. This was a huge downward revision (the estimate for 2009 fell by nearly 2 percentage points over two months), reflecting how officials were shocked by the speed of contraction in the global economy. It also put the world far below the range of 4 to 5 percent per annum that is usually considered acceptable performance. By mid-March, the I.M.F. had reduced its headline growth forecast even further, to no better than a decline of 0.5 percent for 2009, and growth of 1.5 to 2.5 percent for 2010. You might think that these numbers make the case for a global “full steam ahead” set of expansionary policies, but leading European officials insist you are wrong – and here they’ll get a little technical. The I.M.F.’s headline numbers compare average output in one year with its level in the previous year, a potentially misleading measure when the economy is contracting sharply. To understand official thinking more clearly, it’s much better to look at the estimates for fourth quarter on fourth quarter (“Q4 on Q4”), i.e., what will happen within a year, which usually constitute the last two columns in the all-important Table 1.1 of the fund’s releases. Hints and leaks make it clear where officials are going next week. Growth during 2009 will be worse than anemic; the new Q4-on-Q4 estimate for this year (i.e., comparing the fourth quarter of 2009 with the fourth quarter of 2008) will probably be around -1 percent. But growth in 2010 will be forecast to bounce back sharply, rising by at least 2 percent and – quietly – leading officials are suggesting even better performance toward the end of 2010. In other words, the people running the world’s largest economies have agreed, for now, that this will be a V-shaped recession. Output is still falling sharply, but they believe it will quickly turn around and we’ll move back toward rapid growth. This is consistent with the continental European view that the dark dangers of inflation are looming and there is no need, for example, for more fiscal stimulus (i.e., higher government spending or lower taxes). Acquiescence from the American side may seem surprising given the clear signals from the White House that more stimulus may be needed, but it would be awkward to voice those reservations too publicly – remember that the Obama administration’s budget<http://economix.blogs.nytimes.com/2009/02/26/down-with-optimism/>also assumes that a sharp recovery will take hold during 2010. Could this official optimism be right? Yes, but the reasoning looks more like wishful thinking than anything else. It’s true that the inflation risks are likely greater<http://baselinescenario.com/2009/04/06/inflation-prospects-in-an-emerging-market-like-the-us/>than stated in public by American policy makers. But the risks of further financial collapse<http://baselinescenario.com/2009/04/10/does-the-us-still-face-an-emerging-market-type-crisis/>are surely more substantial than the Europeans would like to think, and over all their economies are in bad shape and their denial<http://baselinescenario.com/tag/eurozone/>of these problems is worrying. Around the world, consumers and companies feel that they have taken on too much debt. As they scramble to save more and to pay down those debts, spending will likely struggle to rebound, and any recovery could be slow. Credit systems almost everywhere have suffered considerable damage, and this will also not be helpful to renewed growth. Rather than a V-shaped recovery, at the global level we may be looking at something more like an L-shape<http://baselinescenario.com/2009/04/08/is-it-a-v/>; we go down and we stay down. --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en -~----------~----~----~----~------~----~------~--~---
