Sombre and guarded. Those words best
express the tone and mood of the recently concluded
IMF-World Bank October 2010 meetings. The latest
issue of the IMF’s World Economic Outlook (October
2010) says “downside risks remain elevated. Most
advanced economies and a few emerging economies
still face large adjustments. Their recoveries are
proceeding at a sluggish pace, and high unemployment
poses major social challenges.”
These facts are true and raise a key question: Are
we looking at a double-dip recession? In this piece,
let me start with a proposition; then share with you
some facts; and finally try to answer the question
with whatever data that we possess.
The proposition is that much depends upon how the US
economy behaves over the next few quarters. That’s
obvious. If a country with a 2010 GDP of $14.6
trillion at current prices (and $13.2 trillion at
constant prices) catches a nasty cold, the world
sneezes. Worse still, with an aggregate nominal GDP
of almost $27 trillion if the US and the Euro area
together get sick, the world will go into the ICU.
How, then, fares the US and the Euro area? The US is
suffering from four pieces of bad news. First, GDP
growth which, thanks to the stimulus, had
impressively rebounded in the second half of 2009,
has appreciably slowed down. In 2009 (Q3), the US
came out of the recession to post 1.6% GDP growth.
When that rose to 4.9% in 2009 (Q4), everyone
rejoiced. But thereafter, growth has slowed down:
3.7% in 2010 (Q1) and worse still 1.6% in 2010 (Q2).
Everyone awaits with bated breath for the Q3
Second, the US is suffering from the worst episode
of persistent unemployment in recent history. From
May 2009, for 17 consecutive months, the US has been
hit by monthly non-farm unemployment in excess of
9%. During October to December 2009, it hit 10 per
cent. The last time this happened was between March
1982 and August 1983, when many of today’s
unemployed were not even born.
Third, consumer confidence is down. The Conference
Board’s Consumer Confidence Index (1985 = 100),
which was at a low of 26.9 in March 2009, had
gradually risen to 62.7 in May 2010. Then came the
downer: 54.3 in June, 51 in July, an imperceptible
upward blip in August, followed by a drop to 48.5 in
Fourth, the stimulus is petering out. The immediate
handouts are over. The income generating and
benefits of longer term projects will take some time
to make themselves felt. Being phenomenally risk
averse, banks have actually made it much tougher for
small businesses in the US to secure loans and grow;
large parts of the country are still suffering from
serious home loan foreclosures; and Main Street
remains in considerable pain, with no real hope in
sight for millions of middle class citizens. All
this in a scenario where the US has to reduce its
budget deficit as soon as it possibly can.
The US is heaven compared to most of the Euro area,
except perhaps Germany. If lucky, the Euro zone will
close 2010 with 1.4 per cent growth, versus 2.5 per
cent for the US. It has an average unemployment rate
of 10 per cent which, in many ways, is far worse
than in the US given Europe’s terrible employment
and social security laws and severe labour market
rigidities. Consider this: most European voters will
fight tooth and nail to oppose increasing the
retirement age at a time when post-retirement
longevity will have increased to 25 to 30 years.
With no government having the money to fund
pensions. There seems no hope whatsoever — except
perhaps in Germany — of sharply cutting the deficit.
Europe looks bleak as the babus of Brussels bicker.
So, are we staring at a double dip? The Master of
Doom, Nouriel Roubini, definitely thinks so. Unlike
Roubini, I am no sage. Yet somehow, I don’t think
the double-dip will happen. In the US, GDP growth
will be lower than what was earlier expected; and
the adjustment process will be longer, more painful
and politically tense, especially after the mid-term
elections. It will take more time for unemployment
to fall from 9.6 per cent to around 7 per cent. We
are looking at a longer period of lower growth — in
the 2.5 per cent to 2.2 per cent range — but
probably not another recession, i.e. at least two
successive quarters of negative growth.
In fact, even Europe may avoid recession and remain
in a long period of low growth —between 1.4 per cent
and 1.7 per cent. That’s saying a great deal about
an region for which I am a bear.
I could be wrong. But getting older and more hopeful
is better than aging and being a grouch.
Published: Business World, October 2010