Maurice Obstfeld, the Research Director at the IMF, said last week at the IMF/World Bank Annual Meetings in Washington that global growth “remains weak”, but is “moving sideways”. That is an accurate description of the current situation compared to previous decades, according to the latest results from the Fulcrum nowcasts of global activity.
However, compared to the more recent past, a better assessment would be “solid at the trend growth rate”. Although that trend growth rate is disappointingly low, it is no longer falling (according to the models), and the actual growth rate is no longer below trend, so the global margin of spare resources in no longer increasing. Read more
After several years of moderate but sustained worldwide GDP growth, the spectre of a global recession in 2016 can no longer be completely discounted. Brazil and Russia are already suffering from eviscerating economic down-turns and the growth rates of many other emerging economies, including China, have subsided to well below trend. Although the advanced economies are still growing roughly at trend, the world economy in aggregate is now slowing and the IMF is among many to warn about a sharp increase in downside risks.
The good news is that global recessions are very rare. On the IMF’s preferred definition (ie negative growth in global GDP per capita – the blue line in the graph), there have only been four such events in the entire post war period, in 1975, 1982, 1991 and 2009. The bad news, though, is that when they do occur, they are catastrophic for financial markets and unemployment.
As Lawrence Summers has pointed out, economists are not good at predicting recessions a year in advance. Famously, Paul Samuelson said the stock market had predicted “nine of the last five recessions”. Economists, on the other hand, have predicted none of them. Recessions happen suddenly, sometimes out of a clear blue sky, and forecasters hardly ever build a severe recession into a “main case” forecast more than a quarter or two in advance. Read more
The calmness of the financial markets in the face of the deteriorating Cyprus crisis in the past week has been remarkable. Although Cyprus is tiny enough to be completely overlooked in most circumstances, its economy and banking system have characteristics similar to other, much larger, eurozone countries. Cyprus is certainly at the extreme end, but an over-leveraged banking system, with insufficient capital and reliance on foreign funding, is familiar territory in the eurozone.
Cyprus is therefore, in some respects, a microcosm of the entire eurozone crisis, if a microcosm on steroids. The manner in which the crisis has been handled by the Eurogroup and the ECB will have demonstration effects on other economies, for good or ill.
At the time of writing, the outcome of this weekend’s negotiations remains uncertain. However, assuming that there is no catastrophic breakdown in the talks, leading to the exit of Cyprus from the euro area, the broad outline of the settlement seems to be taking shape. It is reported that the Cypriot government will accept a “bail in” of depositors in one or both of its troubled banks, allowing the release of eurozone financial support, while still keeping the government debt/GDP ratio under 150 per cent. Read more
Nothing in economics is more potent than a simple idea whose time has come. Illustrating this maxim, a three-page article in the IMF’s latest World Economic Outlook promises to have a greater effect on global economic policy than all of the interminable meetings held at the annual meetings of the IMF and the World Bank in Tokyo a week ago.
That article, written by IMF chief economist Olivier Blanchard and Daniel Leigh, presented evidence that the fiscal multiplier  in the advanced economies is considerably larger than had been assumed when fiscal austerity plans were set in train in most economies in 2010. The implication, if they are right, is that austerity is much more damging to output in the near term than was anticipated. As a result, the planned fiscal retrenchment could be hard to sustain in the next few years, not only in the eurozone but in the US and UK as well. In fact, we are already seeing signs of this in peripheral Europe and the UK. Read more
In the second half of 2011, the twists and turns in the eurozone crisis dominated global markets to such an extent that nothing else seemed to matter. This remained true in January and February of this year, when the strong rally in peripheral bond spreads in the eurozone coincided with an equally strong rally in global equities. But in recent weeks, the umbilical link between the eurozone crisis and global risk assets seems to have broken down. As the graph shows, peripheral bond spreads (proxied by the average of Spanish and Italian spreads over German bunds) have returned towards crisis mode, while global equities have fallen only slightly. Read more
The wobble in risk assets in the past week has followed the Fed’s shift towards hawkishness, weaker US jobs data and the budget announcement in Spain. The fact that eurozone equities have once again underperformed US equities suggests that the Spanish budget was probably the dominant factor.
As the first graph shows, Spain’s sovereign bond yields and bank CDS spreads have recently widened to near their worst readings since the crisis started in 2010. What is even more worrying is the consistent upward trend which is apparent in the data. The eurozone rescue operation, mounted by the ECB and heads of government last December, reversed this deterioration only temporarily, and markets now seem to have resumed their earlier adverse trends. Everyone is asking whether this will trigger a new, and larger, eurozone crisis in 2012. Read more
Talks in the eurozone about the intended €130bn bail-out package by the EU and IMF have become more convoluted than ever this week. The latest deadline for a final decision by the eurozone is now said to be Monday, and there is no certainty that the deal will be ratified even then.
However, assuming that the Germans, Dutch and Finns are willing to sanction the deal, which on balance seems likely, the package will produce a further large increase in the exposure of eurozone taxpayers to Greece, without reducing the overall burden of Greek indebtedness very much at all.
The deal would therefore involve a further big step towards the “socialisation” of Greek debt to other eurozone sovereigns, while reducing the exposure of the private sector to any further Greek default. From now on, the burden of Greek debt will either by borne by Greek taxpayers, or by eurozone/IMF taxpayers, depending on whether additional defaults occur in future. It will be a simple head-to-head between sovereign governments, which is why the debate is becoming so heated. Read more
Barack Obama. Image by Getty.
In recent months, the economy has set the agenda for President Obama, and has greatly damaged him in the process. Yesterday’s speech, launching the American Jobs Act, was the president’s attempt to set the agenda for the economy. Clive Crook says that this revitalised president was politically impressive, and adds that we should have seen more of him before now. I will leave the politics to others, and instead ask whether Mr Obama’s plan represents good economics.
That, of course, depends on your definition of “good economics”. Recently, mainstream economic advice (from the IMF, for example) has frequently recommended that there should be some fiscal easing in the short term in order to support demand, and that this should be combined with credible plans to ensure that the government debt ratio is sustainable in the long term. In addition, many economists have argued that any new measures to support the economy should have desirable supply side effects, rather than simply boosting demand in the short term. Against this benchmark, how do the president’s proposals stack up? Read more