New World Bank chief economist Kaushik Basu joked this week that he was running out of letters to describe the progress of the global economy. Neither the ‘U’ nor ‘W’ shaped recoveries had taken place, and the future of the global economy was deeply uncertain.
Here’s a suggestion: if global political leaders don’t change course and abandon austerity, we could be looking at an ‘L’ shaped economy for years to come. As in ‘we fell off a cliff in 2009 and we’ve not gone anywhere since!’
Basu was launching the World Bank’s Global Economic Prospects Report, and it contained a familiar mix of a projection that the global economy will recover (but slightly slower than previously expected) although the last year hasn’t been as good as we expected. For example, last year, Europe’s last great hope, Germany, saw its GDP shrink by 0.5% while China’s GDP grew by ‘only’ 7.9% – its lowest annual growth rate this century.
Developing countries were urged to rebuild “fiscal and monetary buffers” and improve social safety nets and food security. That’s pretty much the equivalent of telling them to panic-buy tinned food in case things get even worse!
So why do we keep hearing the same news? Why are global economic forecasts always being downgraded, but still turning out to have been optimistic? The recent IMF volte-face on economic multipliers is one reason. More broadly, economic forecasters are working from the same faulty economic text books as the politicians who are ignoring everything Keynes discovered, and trying the magic trick of all simultaneously cutting back on spending in the hope that what Krugman calls the confidence fairy will conjure up a recovery in demand.
The worry is that even countries attempting anaemic stimulus packages – eg China and the US – are finding it difficult to show results because their principal export markets are also depressed. In that context, even a German stimulus might well not be enough to cure the Eurozone’s ills.
What the G8 in June and the G20 this September ought to be discussing is a co-ordinated global stimulus (albeit led by those with what the international financial institutions call ‘fiscal space’) to kick start a sustained and rapid recovery, led by increased government investment in infrastructure and training, and higher wages. Can anyone see David Cameron and George Osborne leading that?