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 numbers.

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 September 2010.

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