The Davos consensus spoke up loud and clear on the first day of the World Economic Forum. As I suspected, the darkness of the here-and-now permeated the Congress Center. After I laid out my bearish prognosis in the opening session – an unprecedentedly anaemic growth rate in world GDP of just 2.5% for the next three years – there were those who actually called me an optimist. The indomitable Martin Wolf, whose platform I share temporarily in penning these missives, argued that I was far too sanguine for a world that was already in a “proto-Depression” – whatever that means.
Anything is possible, of course. But I think it is important to resist the bait of oneupmanship and put this prognosis in perspective.
First of all, a 2.5% world GDP growth rate is a multi-year recession-like outcome for the global economy. That’s right, by IMF metrics, whenever the world slips through this growth threshold, it is widely judged to be in recession. If I am right on my three-year call of a 2.5% recession-like outcome, it would be a global malaise without precedent in the modern post-World War II era. Secondly, the 2.5% multi-year projection compares with a nearly 5% pace that prevailed in the four and a half years before the bursting of the subprime bubble in the summer of 2007. A halving of the trend in global growth is a massive deceleration by any stretch of the imagination – the functional equivalent of a passenger being thrown through the windshield when a speeding vehicle screeches to a near standstill.
Finally, it is important to note that the current situation bears little resemblance to the circumstances prevailing during the Great Depression of the 1930s. My 2.5% three year global growth call allows for about a 1% decline in world GDP this year, followed by a 3.5% to 3.75% fiscal policy-induced rebound in 2010 – infrastructure spending is GDP, after all – and then a relapse back into the 2% to 2.5% recession-like range in 2011. In the US, the unemployment rate would peak out at around 10% in such a scenario. This is a terrible outcome by any stretch of the imagination but it pales in comparison to the carnage phase of the 1930s – annualized output declines of 14% in the US and a peak unemployment rate of around 25%. Proto-Depression? Not even close, Martin.
Bears and bulls – the labels do the thoughtful analyst a great disservice. As does the ever-present penchant to up the ante whenever an out-of-consensus forecast comes to pass. That’s a temptation I will resist. When the dust settles, my preference is to be remembered as a realist.
Stephen Roach is chairman of Morgan Stanley Asia and former chief economist at the bank