Thursday, 30 April 2009

Talking a good recovery

The politicians of the world seem to be having some success in talking up  recovery from the world financial crisis. Britain is the latest country where pollsters are finding an improvement in consumer confidence. The Guardian this morning reports voters are more upbeat about the state of the economy than at any time since the financial crisis began in August 2007.  The Gfk NOP consumer confidence index carried out on behalf of the European commission rose three points this month to -27 points, and, says The Guardian, while still low by historic standards has posted a 10-point improvement since January. The big change over the past month was the public's view of the overall state of the economy, which rose from -31 to -15, but voters were also less gloomy about the state of their own personal finances, where the reading rose from -6 to -3.
In Australia the Morgan consumer confidence findings are not dissimilar with the latest reading published last week 102.6 being 1.8 points higher than in April last year. People it seems are of a mind to think that historically low interest rates will do the trick and send things back on the road to growth.
That is the general message of political leaders but I note that a pair of distinguished economic historians have presented evidence that the way the world economy is going still has some frightening similarities to the years of the Great Depression back in the 1930s. Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley and formerly Senior Policy Advisor at the International Monetary Fund. CEPR Research Fellow, and Kevin H. O’Rourke, Professor of Economics at Trinity College Dublin and CEPR Research Fellow, take a global view rather than comparing then and now through looking just at the United States. They believe that the world economy is now plummeting in a Great-Depression-like manner. Indeed, world industrial production, trade, and stock markets are diving faster now than during 1929-30.
They point first to the decline in industrial production in the last nine months that has been at least as severe as in the nine months following the 1929 peak in world industrial production, which occurred in June 1929.
Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression. 
Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.
There is no joy in world trade either. It is falling much faster now than in 1929-30. This is highly alarming, the pair of economists argue, given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

Under the heading "It's a Depression Alright" they conclude:
To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline.
Here the historical comparisons are not so gloomy. A GDP-weighted average of central bank discount rates for 7 countries shows, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. 
Money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP shows monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.

In picture for fiscal policy, in this case for 24 countries, the 1920s measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.
And the conclusion? "The world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

The good news, of course, is that the policy response is very different." 

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