Econ: The Forecast is...?

[Zkribbler]

Interesting chart, Naked. ...especially in light of the fact that Republicans in Congress are complaining that the White House is not providing projections beyond 2012. So, exactly where did you get that chart?

[chequita guevara]

We have plenty of capacity. Increasing it would be the same thing and just giving money away.

We could rebuild our highways, bridges, hospitals, and schools, and build more schools. We could rebuild our sewer systems so that we deal with waste a lot more intelligently and efficiently. We invest in new technology research. We could build a bridge across the Everglades and get rid of the causeways blocking the flow of water.

All of that spending would create more demand for new production that giving money to stupid, greedy capitalists won't do.

[Zkribbler]

I couldn't find any projection on the OBM site.
Here's the one from the CBO website.

[notyoueither]

http://www.economist.com/opinion/displaystory.cfm?story_id=13362027&CFID=47877387&CFTOKEN=25490674

Globalisation and trade

The nuts and bolts come apart
Mar 26th 2009
From The Economist print edition

As global demand contracts, trade is slumping and protectionism rising

COMPARISONS to the Depression feature in almost every discussion of the global economic crisis. In world trade, such parallels are especially chilling. Trade declined alarmingly in the early 1930s as global demand imploded, prices collapsed and governments embarked on a destructive, protectionist spiral of higher tariffs and retaliation.



Trade is contracting again, at a rate unmatched in the post-war period. This week the World Trade Organisation (WTO) predicted that the volume of global merchandise trade would shrink by 9% this year. This will be the first fall in trade flows since 1982. Between 1990 and 2006 trade volumes grew by more than 6% a year, easily outstripping the growth rate of world output, which was about 3% (see chart 1). Now the global economic machine has gone into reverse: output is declining and trade is tumbling at a faster pace. The turmoil has shaken commerce in goods of all sorts, bought and sold by rich and poor countries alike.

It is too soon to talk of a new protectionist spiral. Nevertheless, errors of policy risk making a bad thing worse—despite politicians’ promises to keep markets open. When they met in November, the leaders of the G20 rich and emerging economies declared that they would eschew protectionism and will doubtless do so again when they meet on April 2nd. But this pledge has not been honoured. According to the World Bank, 17 members of the group have taken a total of 47 trade-restricting steps since November.

Modern protectionism is more subtle and varied than the 1930s version. In the Depression tariffs were the weapon of choice. America’s Smoot-Hawley act, passed in 1930, increased nearly 900 American import duties—which were already high by today’s standards—and provoked widespread retaliation from America’s trading partners. A few tariffs have been raised this time, but tighter licensing requirements, import bans and anti-dumping (imposing extra duties on goods supposedly dumped at below cost by exporters) have also been used. Rich countries have included discriminatory procurement provisions in their fiscal-stimulus bills and offered subsidies to ailing national industries. These days, protectionism comes in 57 varieties.

There are good reasons for thinking that the world has less to fear from protectionism than in the past. International agreements to limit tariffs, built over the post-war decades, are a safeguard against all-out tariff wars. The growth of global supply chains, which have bound national economies together tightly, have made it more difficult for governments to increase tariffs without harming producers in their own countries.

But these defences may not be strong enough. Multilateral agreements provide little insurance against domestic subsidies, fiercer use of anti-dumping or the other forms of creeping protection. Most countries are able to raise tariffs, because their applied rates are below the maximum allowed by their WTO commitments. They may choose to do so despite the possible disruption to global supply chains. And because global sourcing amplifies the effect of tariff rises, even action that is permissible under WTO rules could cause a lot of damage. The subtler variants of protection may be similarly disruptive.

The gears of globalisation
The immediate cause of shrinking trade is plain: global recession means a collapse in demand. The credit crunch adds an additional squeeze, thanks to an estimated shortfall of $100 billion in trade finance, which lubricates 90% of world trade.

Just as striking as the speed of the downturn in trade is its indiscriminate nature. The World Bank has January trade data for 45 countries (available figures for G20 countries are shown in chart 2). These are values, expressed in American dollars, and so have been depressed not only by lower volumes but also by falling prices and a stronger dollar. The exports of 37 of these 45 countries were more than a quarter lower than in January 2008. Countries as diverse as Ecuador, France, Indonesia, the Philippines and South Africa saw exports drop by 30% or more. Commodity exporters, such as Argentina, have suffered with sellers of sophisticated manufactures, such as Germany and Japan.



Kei-Mu Yi, an economist at the Federal Reserve Bank of Philadelphia, argues that trade has fallen so fast and so uniformly around the world largely because of the rise of “vertical specialisation”, or global supply chains. This contributed to trade’s rapid expansion in recent decades. Now it is adding to the rate of shrinkage. When David Ricardo argued in the early 19th century that comparative advantage was the basis of trade, he conceived of countries specialising in products, like wine or cloth. But Mr Yi points out that countries now specialise not so much in final products as in steps in the process of production.

Trade grows much faster in a world with global sourcing than in a world of trade in finished goods because components and part-finished items have to cross borders several times. The trade figures are also boosted by the practice of measuring the gross value of imports and exports rather than their net value. For example, a tractor made in America would once have been made from American steel and parts; it would have touched the trade data only if it was exported. Now, it may contain steel from India, and be stamped and pressed in Mexico, before being sold abroad. As a result, changes in demand in one country now affect not just the domestic economy but also the trade flows and economies of several countries.

This mechanism can be seen at work in recent data—for instance, says Mr Yi, in American automotive-trade figures for the last three months of 2008. Imports from everywhere fell by about 20%. On the export side, sales to America’s partners in the North American Free Trade Agreement (NAFTA) fell by 20% whereas those to non-NAFTA countries rose slightly. This, he argues, is because three-quarters of exports to non-NAFTA countries consist of finished vehicles, whereas 60% of exports to NAFTA partners consist of parts and components, most of which return to the United States embodied in imported vehicles. So American exports to other NAFTA countries are to a large extent determined by America’s own demand for cars.

By making trade flows more sensitive to falls in output, vertical specialisation may provide some insurance against widespread protectionism. Manufacturers that rely on imported inputs may resist higher tariffs because they push up the prices of those inputs, making domestic industry less competitive.

Governments using tariffs as trade weapons now have to calculate the consequences far more carefully. This is borne out, for example, by Mexico’s response this month to the suspension by America of a NAFTA programme that allowed some Mexican truckers to carry goods north of the border. Mexico raised some tariffs, but by less than NAFTA rules allowed, and chose the goods carefully in order to limit the damage to its own industries.

Nevertheless, there is plenty of evidence that developing countries, at least, continue to use tariffs extensively. In the World Bank’s study, tariff increases accounted for half of the protective measures by these countries. Ecuador raised duties on 600 goods. Russia increased them on used cars. India put them up on some kinds of steel. Developing countries have more scope for raising tariffs without breaking WTO rules than richer ones do, because the gap between their applied rates and the ceilings they agreed to is greater than for developed countries.

When governments do impose tariffs, vertical supply chains amplify their effects. Because tariffs are typically levied on the gross value crossing the border (with some exceptions, such as exports from Mexican maquiladoras), trade responds more to changes in tariffs—down or up—with global supply chains than without.

But there is another, more subtle reason to worry about even small rises in tariffs. Theoretical models that incorporate vertical specialisation find that it takes off only when tariffs fall below a threshold level. Once this happens, however, trade explodes, so that a slight lowering of trade barriers can cause a huge increase in trade. By the same token, if tariffs rose above a certain point—which might be below the maximum agreed on at the WTO—global supply chains would disintegrate. Trade would drop even more steeply than it has in recent months.

That said, supply chains need not snap so easily. Even if tariffs go up, other costs that determine the viability of supply chains may go down: the price of oil (and hence the cost of transport) has fallen a long way in the past year. Firms have invested a lot in their supply chains and will be loth to abandon them. And if global supply chains do survive, vertical specialisation could help trade recover speedily when demand returns.

Although increased tariffs are a cause for concern, they are far from the only form of protection being used in this crisis. Two-thirds of the trade-restricting measures documented by the World Bank are non-tariff barriers of various kinds. As with tariffs, developing countries are the principal wielders of these weapons.

Indonesia has specified that certain categories of goods, such as clothes, shoes and toys, may be imported through only five ports. Argentina has imposed discretionary licensing requirements on car parts, textiles, televisions, toys, shoes and leather goods; licences for all these used to be granted automatically. Some countries have imposed outright import bans, often justified by a tightening of safety rules or by environmental concerns. For example, China has stopped imports of a wide range of European food and drink, including Irish pork, Italian brandy and Spanish dairy products. The Indian government has banned Chinese toys.

In addition, anti-dumping is on the increase. The number of anti-dumping cases initiated at the WTO had been declining, but it started to pick up in the second half of 2007. The data for 2008 are not yet complete but Chad Bown, an economist at Brandeis University, estimates that the number was 31% higher than in the previous year. The number of cases ending with extra duties went up by 20%. India was the biggest initiator of anti-dumping action, and America and the European Union imposed duties most frequently.

Rich countries’ weapon of choice so far is neither tariffs nor non-tariff barriers to imports. They have been keen users instead of subsidies to troubled domestic industries, particularly carmakers. Some economists, such as Gene Grossman, of Princeton University, cite this as evidence that global sourcing has changed the political economy of protection. The American automotive industry no longer lobbies for direct protection, as it used to, because it imports much of its value-added and competes with foreign firms that assemble their cars in America. Carmakers now prefer explicit subsidies, and the world is replete with examples. Besides America, Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, Italy and Sweden have all also provided direct or indirect subsidies to carmakers. The World Bank reckons that proposed subsidies for the car industry amount to $48 billion. Nearly 90% of this is in rich countries, where it can easily be slipped into budgetary packages to stimulate demand.

The worry about such subsidies is that they could cause production to switch from more efficient plants (eg, in central and eastern Europe) to less efficient ones in rich countries with deep pockets (eg, in western Europe). Whether the location of output is shifting is not yet clear, but politicians plainly hope it will. On March 19th Luc Chatel, the French industry minister, boasted that Renault’s plans to create 400 jobs at a factory near Paris by “repatriating” some production from Slovenia was the result of government aid. Renault has denied this, saying that it was at full capacity in Slovenia.

There are some international rules to prevent distorting subsidies. The EU has regulations to limit state aid, and is looking into its members’ assistance to carmakers. Gary Hufbauer, of the Peterson Institute for International Economics in Washington, DC, argues that American subsidies transgress WTO norms.

Helpful ambiguity
However, WTO action against subsidies is not straightforward. To complain successfully, a country has to show that a subsidy meets several criteria. Then there is a pots-and-kettles problem: having subsidies of your own does not stop you from challenging someone else’s, but if you pick a fight they may have a go at yours. This uncertainty and ambiguity only adds to subsidies’ attraction. Governments can aid their carmakers and at the same time criticise others for their protectionist ways.

Protectionist urges are also being bolstered by countries’ seeming inability to co-ordinate their fiscal stimulus programmes. Some countries have been reluctant to work the budgetary pump for fear that their extra demand will leak abroad to the benefit of foreigners. To stop the seepage, some governments have inserted discriminatory conditions into their fiscal programmes, the prime example being the “Buy American” procurement rules. These were weakened after protests and threats of retaliation from abroad, but not before the prospects for global co-operation had been dented. Greater co-ordination of fiscal expansion would ease governments’ worries about leakage, because everyone else would be leaking too: all would gain from each other’s spending.

What should world leaders do to stop protection fraying the threads that tie the world economy together? The pious declaration at the previous G20 meeting has had little effect. There is a risk that another such promise on April 2nd will prove to be just as empty. The difficulty lies in devising something comprehensive and detailed enough to address the variety of protectionist measures that are being deployed in the crisis, and doing it quickly enough to maintain open trade.

Many argue that the most important thing for world leaders to do is to pledge a quick completion of the Doha round of trade talks, which stalled for the umpteenth time last summer. By reducing tariff ceilings, this would place tighter limits on countries’ ability to increase tariffs. It would also ban export subsidies in agriculture, which are being used with greater vigour, especially as prices of farm goods fall. The EU, for example, has announced new export subsidies for butter, cheese and milk powder. Most important, completing Doha would be the clearest and most tangible evidence possible of a commitment to consolidating and building on the gains from more open trade secured in successive rounds since the second world war.

Some economists disagree. Aaditya Mattoo, of the World Bank, and Arvind Subramanian, of the Peterson Institute, argue that the Doha round is too ambitious given the state of the world economy, because it seeks to open markets for rich countries’ manufactured goods just when the politics are against it. At the same time, they point out that Doha would not restrict the use of some non-tariff measures causing most concern, such as the Buy American provisions or subsidies for failing industries. Messrs Mattoo and Subramanian suggest a new “crisis round” of world trade talks. In the first instance, WTO members could commit themselves to a standstill on all forms of protectionism.

Several other economists have also proposed a standstill. However, Messrs Mattoo and Subramanian suggest that in order to give governments a political reason to agree to this, they should also be allowed to postpone further liberalisation for the duration of the crisis. They would then embark on a new round instead of Doha, which would address the forms of protection that now look most pressing.

But the appetite for starting yet another series of talks is likely to be limited. Even if the crisis round’s agenda were more realistic than Doha’s (which isn’t obvious), there would be no guarantee that it could be concluded quickly enough to stop the bleeding in global trade.

Whatever they think about Doha or about the idea of a crisis round, most economists will agree that a simple promise to resist protectionism will not suffice. Some thing more specific is needed. A good start would be for governments, beginning with the leaders of the G20, to draw up a comprehensive list of protectionist measures that goes beyond tariffs and export subsidies. They could then agree to go no further with these than they have already.

Next, an agreement on co-ordinating fiscal policy would go a long way towards making such a standstill commitment credible, because it would alleviate worries about leakages abroad. Finally, empowering the WTO to name those who break the standstill would help to underpin it. The threat of embarrassment may make some countries think twice.

During the Depression, the volume of world trade shrank by a quarter. Nothing like that has been seen or forecast so far. Yet one lesson from the worldwide economic distress of three-quarters of a century ago is that once trade barriers come up, they take years of negotiation to dismantle. Preventing protectionism from getting worse is preferable to having to repair the damage afterwards. And even if a full-blown trade war can be ruled out, death by a thousand cuts cannot. The costs of myriad piecemeal measures could still add up to damaging protectionism. And when demand does eventually revive, if the world economy is supported by an open system of trade, it will recover all the faster.

[Zkribbler]

Good post NYE, if a bit wordy. Let me summarize.
World trade is a good thing.
World trade is plummetting.
We are screwed

[notyoueither]

http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=13411349

United States
The economy

A faint sound of applause
Apr 2nd 2009 | WASHINGTON, DC
From The Economist print edition

Some signs suggest that the recession is lifting, but the path to recovery is fraught with danger

THE current recession has broken many of the rules of business cycles, but not this one: when something gets cheap enough, buyers emerge.

America’s housing bubble seems mostly deflated. According to the S&P/Case-Shiller 20-city index, house prices through January were down 29% from their all-time peak. Relative to incomes, houses are now 10% undervalued, and relative to rents they are fairly valued, thinks Paul Dales of Capital Economics, a consultancy.

This is luring buyers back. House sales rose unexpectedly in February. The National Association of Realtors estimates that up to 45% of existing homes sold were “distressed” properties—those in, or close to, foreclosure. In Nevada, which with California, Florida and Arizona was the epicentre of the boom and bust, fourth-quarter sales were more than double their level a year earlier. Keith Kelley, a Las Vegas estate agent, has an investor interested in offering about $80,000 for a foreclosed, four-unit apartment building which, fully let, could bring in over $25,000 a year in gross rent. He has two buyers interested in paying $220,000 for a five-bedroom house that sold in 2004 for more than triple that. Their monthly mortgage payment would be about half the rent on a similar property. Even so, he says, “I still talk to buyers waiting to see when we get to the bottom.” Indeed, homes may be fairly valued now but could get dirt cheap if, as commonly happens, prices overshoot.

The stabilising of the housing market is one of several tantalising glimmers that the end of the recession may be in sight. In March factory purchasing managers were their least gloomy about new orders since last August. Vehicle sales rose 8% in March from February. New claims for unemployment insurance have stopped rising. Gross domestic product, which shrank at a 6.3% annual rate in the fourth quarter, probably shrank at a similar rate in the first, but the composition of the drop was more encouraging; it was driven not by the collapse in consumer spending, but by sinking output as businesses sought to bring inventories into line with lower sales. Second-quarter growth “has a good chance of being positive”, according to Ian Morris and Ryan Wang, economists at HSBC, though “the risks…are still huge.”

What has brought this turnabout? In part, the normal corrective powers of the economy. Larry Summers, Barack Obama’s main economic adviser, has noted that current annualised vehicle sales of about 9m are well below the 14m necessary for replacement and rising population, while annualised housing starts are about a quarter of the rate needed to support the forming of new households.

The improvement is also the expected response to monetary and fiscal stimulus, both of which have been exceptionally aggressive. The Federal Reserve, having lowered short-term interest rates in effect to zero, has intervened in bond markets to push down long-term mortgage rates as well. On April 1st paycheques were due to begin reflecting the tax cuts in Barack Obama’s $787 billion fiscal stimulus.

As investors have shifted their economic outlook from catastrophic to merely grim, the stockmarket has shot higher, by 19% on April 1st from its 12-year low on March 9th. Like houses, stocks look cheap. Strategists at Deutsche Bank estimate that investors can expect to earn an additional seven percentage points over the long run from holding stocks instead of Treasury bonds, the highest such “equity risk premium” in at least 25 years. Mr Summers says it may be “the sale of the century”.

Yet even if the bottom in economic activity is in sight, a robust recovery almost certainly is not. Housing usually leads the way out of recession as falling interest rates unleash pent-up demand. But easy credit in earlier years has turned many renters into homeowners already. At the end of last year 67.5% of households owned their home, down from a peak of 69% in 2006 but still well above the 64% that prevailed from 1965 to 1997. Moreover, many prospective buyers cannot take advantage of low mortgage rates because higher down-payments are now required.

The tonic of lower interest rates has been dulled by the dysfunctional financial system. That is why credit markets have not reflected the optimism of stocks and are forcing corporations to pay punitive yields on the bonds they issue (see chart).

Consumer spending may also be depressed for some years to come by the record 18% collapse in household net worth over the course of last year, a drop of $11 trillion. That is a chief reason why the OECD on March 31st released an exceptionally gloomy prognosis, predicting that the American economy would shrink by 4% this year and not grow at all next year. Deflation, it said, “may become a threat”.

The greatest risk of renewed recession or stagnation comes from the banking system. As long as home prices keep falling and unemployment keeps rising, banks’ bad loans will keep mounting. Huge questions hang over the Treasury’s plan to remove those loans, and many economists think it must commit more public capital than the already authorised $700 billion in TARP money. Perversely, a continued stockmarket rally could undermine the chances of more aid, lulling some in Washington to believe enough has been done.

Tim Geithner, the treasury secretary, understands that. “The big mistake governments make in recessions”, he said on March 29th, “is…they see that first glimmer of light, and the impetus to policy fades.” Yet he hurt his own case the same day by saying that more TARP money is not needed for now because some banks will repay the government capital they have previously received. That is bad news, not good news: banks are lining up to repay the money to free themselves from political interference, even though the loss of capital will constrain their lending. That increases the odds of a multi-year, Japanese-style credit crunch.

Even if the administration wants the money, Congress at present is in no mood to grant it. The Senate and House budget resolutions were silent on the administration’s request for $750 billion in extra funds (with a budgeted cost of $250 billion). The administration is wisely waiting for tempers to cool before asking for the money.

[notyoueither]

http://www.economist.com/opinion/displaystory.cfm?story_id=13527685&CFID=53546433&CFTOKEN=32083964

The world economy

A glimmer of hope?
Apr 23rd 2009
From The Economist print edition

The worst thing for the world economy would be to assume the worst is over



THE rays are diffuse, but the specks of light are unmistakable. Share prices are up sharply. Even after slipping early this week, two-thirds of the 42 stockmarkets that The Economist tracks have risen in the past six weeks by more than 20%. Different economic indicators from different parts of the world have brightened. China’s economy is picking up. The slump in global manufacturing seems to be easing. Property markets in America and Britain are showing signs of life, as mortgage rates fall and homes become more affordable. Confidence is growing. A widely tracked index of investor sentiment in Germany has turned positive for the first time in almost two years.

All this is welcome—not least because the slump has been made so much worse by panic and despair. When the financial system was on the brink of collapse in September, investors shunned all but the safest assets, consumers stopped spending and firms shut down. That plunge into the depths could be succeeded by a virtuous cycle, where the wheels of finance turn again, cheerier consumers open their wallets and ambitious firms turn from hoarding cash to pursuing profits.

But, welcome as it is, optimism contains two traps, one obvious, the other more subtle. The obvious trap is that confidence proves misplaced—that the glimmers of hope are misinterpreted as the beginnings of a strong recovery when all they really show is that the rate of decline is slowing. The subtler trap, particularly for politicians, is that confidence and better news create ruinous complacency. Optimism is one thing, but hubris that the world economy is returning to normal could hinder recovery and block policies to protect against a further plunge into the depths.

Luminous indicators
Begin with those glimmers. It is easy to read too much into the gain in share prices. Stockmarkets usually rally before economies improve, because investors spy the promise of fatter profits before the statisticians document a turnaround. But plenty of rallies fizzle into nothing. Between 1929 and 1932, the Dow Jones Industrial Average soared by more than 20% four times, only to fall back below its previous lows. Today’s crisis has seen five separate rallies in which share prices rose more than 10% only to subside again.

The economic statistics are hard to interpret, too. The past six months have seen several slumps, each with a different trajectory. The plunge in manufacturing is in part the result of a huge global inventory adjustment. With unsold goods piling up and finance hard to come by, firms around the world have slashed production even faster than demand has fallen. Once firms have run down their stocks they will start making things again and the manufacturing recession will be past its worst.

Even if that moment is at hand, two other slumps are likely to poison the economy for much longer. The most important is the banking crisis and the purge of debt in the bubble economies, especially America and Britain. Demand has plummeted as tighter credit and sinking asset prices have exposed consumers’ excessive borrowing and scared them into saving more. History suggests that such balance-sheet recessions are long and that the recoveries which eventually follow them are feeble.

The second slump is in the emerging world, where many economies have been hit by the sudden fall in private cross-border capital flows. Emerging economies, which imported capital worth 5% of their GDP in 2007, now face a world where cautious investors keep their money at home. According to the IMF, banks, firms and governments in the emerging world have some $1.8 trillion-worth of borrowing to roll over this year, much of that in central and eastern Europe. Even if emerging markets escape a full-blown debt crisis, investors’ confidence is unlikely to recover for years.

These crises sent the world economy into a decline that, on several measures, has been steeper than the onset of the Depression. The IMF’s latest World Economic Outlook expects global output to shrink by 1.3% this year, its first fall in 60 years. But the collapse has been countered by the most ambitious policy response in history. Central banks have pumped out trillions of dollars of liquidity and, in rising numbers, have resorted to an increasingly exotic arsenal of “unconventional” firepower to ease credit markets and loosen monetary conditions even as policy rates approach zero. Governments have battled to prop up their banks, committing trillions of dollars in the process. The IMF has new money. Every big rich country has bolstered demand with fiscal stimulus (and so have many emerging ones). The rich world’s budget deficits will, on average, reach almost 9% of GDP, six times higher than before the crisis hit.

The Depression showed how damaging it can be if governments don’t step in when the rest of the economy seizes up. Yet action on the current scale has never been tried before and nobody knows when it will have an effect—let alone how much difference it will make. Whatever the impact, it would be a mistake to confuse the twitches of an economy on life-support with a lasting recovery. A real recovery depends on government demand being supplanted by sustainable sources of private spending. And here the news is almost uniformly grim.

Searching for new demand
Take the country many are pinning their hopes on: America. The adjustment in the housing market began earlier there than anywhere else. Prices peaked almost three years ago, and are now down by 30%. Manufacturing production has been falling at an annualised rate of more than 20% for the past three months. And the government’s offsetting policy offensive has been the rich world’s boldest.

As the inventory adjustment ends and the stimuli kick in, America’s slump is sure to ease. Cushioned by the government, the economy may even begin to grow again before too long. But it is hard to see the ingredients for a recovery that is robust enough to stop unemployment rising. Weakness abroad will crimp exports. America’s banks are propped up with public capital, but their balance-sheets are clogged with toxic assets. Consumer spending and firms’ investment will be dragged lower by the need to pay back debt and restore savings. This will be a long slog. Private-sector leverage, which rose by 70% of GDP between 2000 and 2008, has barely begun to unwind. At 4%, the household savings rate has jumped sharply from its low of near zero, but it is still far below its post-war average of 7%. Higher unemployment and rising bankruptcies could easily cause a vicious new downward lurch.

In Britain, given the size of its finance industry, housing boom and consumer debt, the balance-sheet adjustment will, if anything, be greater. The weaker pound will buoy exports, but fragile public finances suggest that Britain has much less scope to use government spending to cushion the private sector than America does—as this week’s flawed budget made painfully clear (see article).

The outlook should in theory be brighter for Germany and Japan. Both have seen output slump faster than in other rich countries because of the collapse in trade and manufacturing, but neither has the huge private borrowing of the sort that haunts the Anglo-Saxon world. Once inventories have adjusted, recovery should come quickly. In practice, though, that seems unlikely, especially in Germany. As the output slump sends Germany’s jobless rate towards double-digits, it is hard to see consumers going on a spending spree. Nor has the government shown much appetite for boosting demand. Germany’s fiscal stimulus, although large by European standards, falls well short of what it could afford. Worse, the country’s banks are still in trouble. Germans did not behave recklessly, but their banks did—along with many others in continental Europe. New figures from the IMF suggest that European banks face some $1.1 trillion in losses, hardly any of which have yet been recognised (see article). This week’s German plan to set up several bad banks was no more than a down payment on the restructuring ahead.

Japan has acted more boldly. Its latest package of tax cuts and government spending, unveiled in early April, will provide the biggest fiscal boost, relative to GDP, of any rich country this year. Its economy is likely to perk up, temporarily at least. But its public-debt stock is approaching 200% of GDP, so Japan has scant room for more fiscal stimulus. With export markets weak, demand will soon need to be privately generated at home. But the past two decades offer little evidence that Japan can make that shift.

For the time being, the brightest light glows in China, where a huge inventory adjustment has exaggerated the impact of falling foreign demand, and where the government has the cash and determination to prop up domestic spending. China’s stimulus is already bearing fruit. Loans are soaring and infrastructure investment is growing smartly. The IMF’s latest forecast, that China’s economy will grow by 6.5% this year, may prove conservative. Yet even China has its difficulties. Perhaps three-quarters of the growth will come from government demand, particularly infrastructure spending.

Not much to glow about
Add all this up and the case for optimism fades quickly. The worst is over only in the narrowest sense that the pace of global decline has peaked. Thanks to massive—and unsustainable—fiscal and monetary transfusions, output will eventually stabilise. But in many ways, darker days lie ahead. Despite the scale of the slump, no conventional recovery is in sight. Growth, when it comes, will be too feeble to stop unemployment rising and idle capacity swelling. And for years most of the world’s economies will depend on their governments.

Consider what that means. Much of the rich world will see jobless rates that reach double-digits, and then stay there. Deflation—a devastating disease in debt-laden economies—could set in as record economic slack pushes down prices and wages, particularly since headline inflation has already plunged thanks to sinking fuel costs. Public debt will soar because of weak growth, prolonged stimulus spending and the growing costs of cleaning up the financial mess. The OECD’s member countries began the crisis with debt stocks, on average, at 75% of GDP; by 2010 they will reach 100%. One analysis suggests persistent weakness could push the biggest economies’ debt ratios to 140% by 2014. Continuing joblessness, years of weak investment and higher public-debt burdens, in turn, will dent economies’ underlying potential. Although there is no sign that the world economy will return to its trend rate of growth any time soon, it is already clear that this speed limit will be lower than before the crisis hit.

Start preparing for the next decade
Welcome to an era of diminished expectations and continuing dangers; a world where policymakers must steer between the imminent threat of deflation while countering investors’ (reasonable) fears that swelling public debts and massive monetary easing could eventually lead to high inflation; an uncharted world where government borrowing reaches a scale not seen since the second world war, when capital controls ensured that savings stayed at home.

How to cope with these dangers? Certainly not by clutching at scraps of better news. That risks leading to less action right now. Warding off deflation, for instance, will demand more unconventional steps from more central banks for longer than many now seem to foresee. Laggards, such as the European Central Bank, do themselves and the world no favours by holding back. Nor should governments immediately seek to take back the fiscal stimulus. Prolonged economic weakness does far greater damage to public finances than temporary fiscal activism. Remember how Japan snuffed out its recovery in the 1990s by rushing to raise taxes.

Japan also put off bank reform. Countries facing big balance-sheet adjustments should heed that lesson and nudge reform along, in particular by doing more to clean up and restructure the banks. Countries with surpluses must encourage private spending at home more vigorously. China’s leaders are still doing too little to boost private citizens’ income and their spending by fostering reforms, from widening health-care coverage to forcing state-owned firms to pay higher dividends.

At the same time policymakers must give themselves room to change course in the future. Central banks need to lay out the rules that will govern their exit from exotic forms of policy easing (see article). That may require new tools: the Federal Reserve would gain from being able to issue bonds that could mop up liquidity. All governments, especially those with the ropiest public finances, should think boldly about how to lower their debt ratios in the medium term—in ways that do not choke off nascent private demand. Rather than pushing up tax rates, they should think about raising retirement ages, reining in health costs and broadening the tax base.

This weekend many of the world’s finance ministers and central bankers will meet in Washington, DC, for the spring meetings of the IMF and World Bank. Amid rising confidence, they will be tempted to pat themselves on the back. There is no time for that. The worst global slump since the Depression is far from finished. There is work to do.

[chequita guevara]

http://weblogs.newsday.com/news/opin...ngalong_1.html

[notyoueither]

That is amusing.

[Drake Tungsten]

there's certainly no reason to think we're on the verge of another depression. The recession still seems likely to end sometime in 2009.

NGR wins!

The US economy grew at an annualised rate of 3.5% between July and September, its first expansion in more than a year, official data has shown.

Analysts say the growth was helped by the cash for clunkers car scrappage scheme, and the fear is growth will now fall after this ended in August.

The US economy was also lifted by President Obama's $787bn (£480bn) economic stimulus plan.

But with unemployment still high, the ongoing recovery is set to be slow.

The economic growth between July and September indicates that the US has likely exited a recession that first started in December 2007.

http://news.bbc.co.uk/2/hi/business/8331497.stm

I await NYE's mea culpa for all his baseless fear-mongering about the coming depression.

[rah]

Until the employment numbers improve, the jury is still out as far as I'm concerned.

[notyoueither]

NGR wins!

The US economy grew at an annualised rate of 3.5% between July and September, its first expansion in more than a year, official data has shown.

Analysts say the growth was helped by the cash for clunkers car scrappage scheme, and the fear is growth will now fall after this ended in August.

The US economy was also lifted by President Obama's $787bn (£480bn) economic stimulus plan.

But with unemployment still high, the ongoing recovery is set to be slow.

The economic growth between July and September indicates that the US has likely exited a recession that first started in December 2007.

http://news.bbc.co.uk/2/hi/business/8331497.stm

I await NYE's mea culpa for all his baseless fear-mongering about the coming depression.

How about yours for getting the quote wrong?

The US economy grew at an annual pace of 3.5% between July and September, its first expansion in more than a year.

The growth was helped by a substantial government spending plan, including a scrappage scheme to boost car sales.

The official figures indicate recession has ended, but some economists think there could be further setbacks.

President Obama said while "welcome news", the US was still a "long way" from recovering from the "deepest downturn since the Great Depression".

To be fair, the article was updated earlier today. That is some significant editing though. Hmmm...

[KrazyHorse]

Hmmm what?

I'd bet with 80% certainty that the NBER will, when they call the end of the recession (which is, by the way, not even obviously the worst since the Great Depression) they will place its end in Q3 2009, with most of the rest of the prob. in Q4 2009 (this will depend greatly on Oct. job numbers due out in 8 days).

[KrazyHorse]

Meanwhile, the Canadian recession is probably also close to being over (may drag on a couple more months, depending on your criteria?) and was FAR less severe than the US recession (~1/2 as bad, on most important metrics), which puts it way below the early 90s ****fest.

[KrazyHorse]

Oil prices and flexible exchange rates helped soften the employment blow, spreading out pain by reducing Canada's terms of trade. Now that resource prices are bouncing back the opposite may happen; employment may not grow as quickly as in the US, but real GDP could show faster growth. The BoC might keep interest rates lower for longer as an appreciated currency slowly provides deflationary pressure (this effect lags actual currency movements).