"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.
There is a gloomy view of the global economy,and the talk of secular stagnation is always present
at debates.
"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.
There is a gloomy view of the global economy,and the talk of secular stagnation is always present
at debates.
"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 when panic abated in global markets,before the wounds had fully healed, the treatment was terminated.
The fiscal stimulus of the U.S., Germany and U.K.economies, came to an end too soon, and as a result the world economy didn't recovered as much as it was expected.
"Countries now seem to think that monetary-policy measures are their only option"
America leads the world in monetary-policy ambition.QE helped American exports by weakening the dollar relative to other currencies. Once the Japanese engineered their own QE, the yen promptly depreciated. That has kept the euro strong.
The weakest of the “big three” developed economies – the eurozone – has thus been left with the strongest currency. In the third quarter of 2013, Germany’s export growth slowed and French exports fell. After a spike earlier in the year, Japan’s exports have also contracted. Only US exports have maintained some traction, thanks to the weaker dollar.
In the 1930’s, after the gold standard broke down, world leaders could not agree on coordinated reflation of the global economy. In his book Golden Fetters, the economist Barry Eichengreen argued that the lack of coordinated action dragged out the global recovery process. Such delays are costly, and risk allowing pathologies to fester, prolonging the healing process further.
Now, despite unfavorable political circumstances, Blanchard should make an even bolder call. These are still not “normal” times, and the “vicious cycles” persist. Another global fiscal stimulus – focused on public investment in infrastructure and education – would deliver the adrenaline shot needed for a robust recovery.
More public investment is twice blessed. It can shake the world out of its stupor; and it can safeguard against “secular stagnation.” The US, Germany, the United Kingdom, France, and China should act together to provide that boost. Otherwise, a sustainable global recovery may remain elusive, in which case 2014 could end in low gear as well".
Source: Ashoka Mody*, Project-Syndicate
Visiting Professor of International Economic Policy
at Princeton University
