Mody, A., (2013), “The looming lost decade”, Bruegel, 18 December.
As 2013 comes to an end, it looks like the world economy will remain stuck in low gear.
For those reading the tea leaves of global recovery, the third-quarter GDP numbers offered no solace. While the United States is ahead of the pack, some of its gains could soon be lost, as accumulating inventories begin eroding profits. Despite glimmers of hope, the eurozone and Japan are struggling to cross the 1% threshold for annual economic growth. And the major emerging economies are all slowing, with Russia practically at a standstill.
Not surprisingly, a catchphrase in economic-policy debates nowadays is “secular stagnation,” the idea that excess savings chronically dampen demand. The economist Robert Gordon has also argued that the world is low on economically productive ideas.
But before we despair, there is work to be done. The coordinated fiscal stimulus that saved the world from economic collapse in 2009 disappeared too quickly, with governments shifting their focus to domestic politics and priorities. As domestic policy options have been exhausted, economic prospects have dimmed. A renewed emphasis on stimulus must be augmented by global coordination on the timing and content of stimulus measures.
The crisis was and remains global. Trade data tell the story: after increasing by about 7% annually in the decade before 2008, world trade fell faster than global GDP in 2009 (and more sharply than during the Great Depression). Once the brief stimulus-fueled recovery faded, growth in world trade again slowed quickly, falling to 2% year on year over the past 18 months. Disappointing export performance is largely responsible for the recent weakening of economic-growth prospects.
At the end of 2008, when the scale of the impending economic destruction was not yet apparent, Olivier Blanchard, the International Monetary Fund’s chief economist, boldly called for a global fiscal stimulus, stating that, in these “not normal times,” the IMF’s usual advice – fiscal retrenchment and public-debt reduction – did not apply. He warned that if the international community did not come together, “vicious cycles” of deflation, liquidity traps, and increasingly pessimistic expectations could take hold.
Fortunately, world leaders listened, agreeing in April 2009 at the G-20 Summit in London to provide a total of $5 trillion in fiscal stimulus. The US and Germany added stimulus amounting to about 2% of GDP. And China’s banks pumped massive amounts of credit into the country’s economy, enabling it to sustain import demand, which was critical to the global recovery.
But hubris rapidly set in, and parochial interests took over. Before the wounds had fully healed, the treatment was terminated.
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Σχετικές Αναρτήσεις
- Bützer, S., Jordan, C. and Stracca, L., (2013), “Global and Eurozone imbalances: A question of civic capital?”, VoxEU, 23 Νοεμβρίου.
- Brender, A., Pisani, F. and Gagna, E., (2013), The Sovereign Debt Crisis: Placing a curb on growth, Brussells: Centre for European Policy Studies (CEPS).
- Fernández-Villaverde, J., Garicano, L., Santos, T., (2013) “Political Credit Cycles: The Case of the Eurozone”, Journal of Economic Perspectives, Vol. 27, N3, pp. 145-66.