A 1.3% fall in global GDP may not sound that bad to some readers, but in fact it is a horrid outcome. Most of us deal with advanced economy growth statistics, which are lower than those of emerging economies. And a negative world result of this level again confirms the sychronized nature of this contraction.
From the Financial Times:
The global economy will contract sharply this year and recover only sluggishly in 2010, the International Monetary Fund said on Wednesday as it called on governments to sustain or even increase fiscal stimulus next year.
The IMF said that world output would contract by 1.3 per cent this year and grow by just 1.9 per cent the year after in what it described as a “substantial downward revision” of its January forecasts, when it said that the global economy would grow by 0.5 per cent this year and spring back to 3 per cent growth in 2010…
The new forecasts came as Japan reported its first quarterly trade deficit in nearly three decades for the year to March, highlighting the global downturn’s effect on the world’s second-largest economy, which remains heavily reliant on exports….
The fund blamed the worsening prospects on the intensifying “vicious circle” between the ailing financial sector and the shrinking real economy.
Overall credit to the private sector in advanced economies will decline in 2009 and 2010 as banks continue to reel in lending, it said. Any global recovery would depend on more decisive efforts to shore up financial institutions, it added.
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Goldman Sachs is raising China groath forecast to 8.3% for 2009 and 10.9% for 2010.
Northen Trust is raising US Q109 forecast to -3.8%, although they have revised the Q209 forecast downwards.
Also, I believe the IMF has an incentive to make a more dire forecast in order to get more support for increasing its own role.
All in all, I think that the IMF is being too pessimistic.
tyaresun,
Did you actually read the IMF’s latest World Economic Forecast? It has made an extensive study of both past financial crises and synchronized global recessions. Its findings on financial crises is very consistent with the Reinhart/Rogoff work we’ve cited often here.
If you knew that body of work, you would find that the IMF recovery projections are actually optimistic relative to historic norms. GDP typically contracts by 5% over a two year period in a financial crisis. Stock markets take 3 1/2 years to trough. Housing takes over 5 years to bottom. The IMF recovery projection for 2010 is too robust, given that pretty much every respectable economist says the stimulus packages in the US, China, Germany, and Japan are too small and monetary policy is at the point of diminishing returns.
If the IMF had wanted to use dire forecasts to increase its role, the time would have been before the G20, not after.
Forgot to mention: The FT’s Lex column grumbles about the IMF forecast, which I find a weird posture. For instance, it complains that the IMF forecasts negative 5.6% growth for Germany, Yet Steinbruck came out today and said a fall in GDP of over 5% was “not unlikely”. Similarly, the IMF sees no second half recovery (versus other US forecasts which anticipate growth) which I find likely. The stimulus is insufficient, states are slashing budgets, unemployment is rising, and banks (due to changes in credit card rules) will cut consumer credit even further.
I have a lot of respect for Rogoff and Reinhart. One of the things I am not very clear about is whether their studies take into the responses of the affected parties in each episode. My sense is that because they look at averages the reported numbers are net of the actions taken by each affected party. I believe that the actions this time by the affected parties are more drastic and can the average results will be less drastic as a consequence.
Perhaps you or the other readers can help me out here.
Not even as close to as “drastic” as you would hope. Some people don’t even yet realize how bad the numbers are, most of america for instance.
Smart spending by the government is one of the only ways to deal with the inevitable demand destruction. At best, we might be able to choose what industry to save, now its up to the banks.
The stimulus package was useless and impotent, it will not do enough. Public opinion is dead set against any more “spending”.
The “new deal” of the 1930’s dwarfs any thing that has been proposed, the world over. Europe still thinks its insulated. China took US monetary policy (and world reserve currency) hostage, and don’t even understand what they did.
Looking great…Nothing to do here, dow is up.
Yves, I think -9% instead of -5%. Their term “output”:
“First, asset market
collapses are deep and prolonged. Real housing price declines average 35 percent
stretched out over six years, while equity price collapses average 55 percent over a
downturn of about three and a half years. Second, the aftermath of banking crises is
associated with profound declines in output and employment. The unemployment rate
rises an average of 7 percentage points over the down phase of the cycle, which lasts on
average over four years. Output falls (from peak to trough) an average of over 9 percent,
although the duration of the downturn, averaging roughly two years, is considerably
shorter than for unemployment. Third, the real value of government debt tends to
explode, rising an average of 86 percent”
http://www.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf
While I think prediction is nigh impossible due to all the interventions, and special circumstances, my mind keeps returning to the global trade numbers….
Hal,
Thanks for the correction, I need stronger reading glasses.
Good comment, Bob.
Obama should have sent the message to Europe and China early on by nationalizing the dead elephants — it would have been a big display of political courage that would have set an example.
I know the guy has a long-game rope-a-dope style (ask Hillary McCain), but you can’t size up and play “the economy” that same way. He may have been somewhat successful playing the GOP to get his bailout stuff through, but economic fallout will probably hit before political eggs hatch. If that’s the case, he really is thinking more politically than practically.
Its almost as though he’s Asian — massaging and manipulating his opposition but allowing them to save face. This only works when the other guy recognizes it. His most vehement opposition is too rabid and insecure to recognize and accept the gesture. His opposition supporters don’t have the political courage to stand up to their shrill incompetent compatriots. If Obama didn’t get something cracking with Lindsey Graham and his GOP Senate bailout supporters on the weekend that the SC Senator (hello, BoA) advocated nationalization, then he really left this in the lap of the Treasury.
The IMF forecast was after certain figures were massaged on request by UK, US and Canadian governments, so are likely to be on the optimistic side of what they actually think. As for Goldman’s view of China recovering then I recommend reading the latest blog by Michael Pettis who points out that all the bank lending and stimulus actually is not resulting in any real lift in jobs.
The world bank updated its forecast at the end of March to reflect changing conditions, predicting a 1.7 percent drop in global GDP which make the IMF forecast look on the rosy side. They expect china to slump to 5.6 percent growth which may not reflect recent developments but is a long way short of receovery. Perhaps most chilling is the thought that 65 million people are estimated to remain under the $2 a day poverty line in 2009.
minor gripe, in good post in excellent blog, which is high on my daily surfing
headline:
“imf expects 1.3% fall in global growth in 2009”
is not -correct- first sentence:
“a 1.3% fall in global gdp”
headline suggests, world gdp growing 1.9% this year (i.e. 2008: 3,2% – 1,3%), or from a trend growth
in fact, hairsplitters would say the change is so negligible to be unnoticeable (i.e. 98.7% x 3.2 % : 3,1584%), which differes from 1.3 p.p. fall from trend
mangy cat
ah, this link I provided re the -9% is the May 2009 update on the original article to include US 1929 into the data!
“A year ago, we (Carmen M. Reinhart and Kenneth S. Rogoff, 2008a) presented a
historical analysis comparing the run-up to the 2007 U.S. subprime financial crisis with
the antecedents of other banking crises in advanced economies since World War II. We
showed that standard indicators for the United States, such as asset price inflation, rising
leverage, large sustained current account deficits, and a slowing trajectory of economic
growth, exhibited virtually all the signs of a country on the verge of a financial crisis—
indeed, a severe one. In this paper, we engage in a similar comparative historical analysis
that is focused on the aftermath of systemic banking crises.
In our earlier analysis, we deliberately excluded emerging market countries from
the comparison set, in order not to appear to engage in hyperbole. After all, the United
States is a highly sophisticated global financial center. What can advanced economies
possibly have in common with emerging markets when it comes to banking crises? In
fact, as Reinhart and Rogoff (2008b) demonstrate, the antecedents and aftermath of
banking crises in rich countries and emerging markets have a surprising amount in
common. There are broadly similar patterns in housing and equity prices,
unemployment, government revenues and debt.”