The argument goes like this. The London G20 took place after several months of extreme effort by the world’s governments and monetary authorities to restart economic growth. We are hearing from Mervyn King how close the Royal Bank of Scotland and HBOS were to going under the previous October, and, of course, the main developed world economies went on declining through to the second or third quarters of this year. But we now know that the bottom of the cycle as measured by G7 industrial production was reached in March. By April the stock markets had bounced up, and all the G20 meeting did was to highlight the scale of the actions that the authorities had taken. Indeed the G20 meeting came after the world economy had turned.
Since then there has been a stream of better news. The upturn signalled by the markets is now continuing.
Now things get harder. It is not possible for most governments to provide a further fiscal stimulus. The deficits are too big. Here in Britain we will see fiscal policy tightening next year, whoever is in power. Next year will also see monetary policy tightening, with the exceptional measures to boost money supply coming to an end and by the end of the year interest rates starting to rise. Indeed the central banks yesterday indicated that they would start to scale back their emergency liquidity programmes. In a co-ordinated announcement the Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank set out various measures designed to show that things were getting back to normal.
As the various other schemes to boost the world economy come to an end ? the cash for old cars, the cut here in VAT and the various fiscal boosts worldwide ? the drive for growth will have to come from the private sector, and in particular from consumption. There are a number of reasons to suspect that consumers throughout the developed world will be pretty cautious for some months yet. You can already catch a little of that caution, particularly here in the UK, but also in the US and Europe. By early next year people may be quite angry, and quite fearful, of what has been happening. We would be less than human if we did not blame the policy-makers for the economic woes.
So what will the autumn be like? The biggest single issue will be the pace of the recovery worldwide. There is a really interesting debate taking place about this. Most mainstream forecasters, including the International Monetary Fund, expect a muted recovery. Things will come up much more slowly than they went down. You can see both a decline in G7 industrial output and the rate of recovery as implicit in the IMF forecasts. But you can also see the possibility of a much faster one, a “Zarnowitz” recovery, so-called after the Jewish economist Victor Zarnowitz, who fled the Nazis in 1939 and subsequently taught economics at the University of Chicago. He looked at back data for the economic cycle, and concluded that when production went down very fast it also tended to recover swiftly too.
Simon Ward, economist at the fund manager Henderson New Star, has sketched how the Zarnowitz rule might be applied to our present predicament. As you can see, the world recovers its previous level of output much more swiftly than mainstream forecasters predict. So far at least, output seems to be much closer to the Zarnowitz path rather than to the IMF one.
If that is sustained, then maybe the world can breathe again. We will be back to the level of output at the peak by the end of 2011. But is this really likely to happen in the light of the adverse forces noted above?
My guess, and it is little more than that, is that the outcome will be somewhere between the two, but with a series of disappointments through the winter and first part of next year before a sustained recovery takes place towards the end of 2010. If that is right, this G20 meeting will be perceived as a failure, and there will be a rough ride next spring when the next G20 takes place.
Will that matter? Yes and no. Yes, because the longer it takes for economic growth to recover, the more misery for everyone. No, because ultimately what matters most is that the recovery is sustainable, and not an artificial creation.
That leads to a further question: will consumption be strong enough to take over when the special measures are withdrawn?
There has been some growth in world consumption over the past couple of years, but just about all that growth has come from the emerging world; Germany and France are up a bit, but most of the developed countries have lost ground.
Looking ahead to next year, the pattern continues. Forecasts from Goldman Sachs are a little more optimistic than those of the IMF, but the big point here is that the Brics (Goldman’s acronym for Brazil, Russia, India and China) are set to grow much more quickly than the G7. The slowest Bric, Brazil, is forecast to grow at more than double the rate of the fastest G7 nation, the US.
Goldman, by the way, is relatively optimistic about the UK’s prospects, massively more so than many other forecasters, including the OECD.
The point about all this is that the shape of the recovery will depend as much on the Brics as on the G7. This will be the first global recovery ever when this will be the case. It is completely outside our experience. The possibility of a Zarnowitz recovery noted above refers to the G7’s industrial production, but anyone wanting to understand what is happening needs to think of the consumers in China, India and the rest of the developed world as much as what is happening here or in the US.
This imbalance will in all probability continue in the years ahead. There is a lot of talk about globalisation being threatened by the banking crash, the collapse of international investment flows, and so on. But in one sense the recession has speeded up the process of globalisation: it has shifted power more swiftly to the emerging economies.
Maybe that is how we will see this G20 meeting: not much of a success story for the G7, but a rather better tale for the rest of the world.
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