The never ending recession

Last week Alan Kohler, noting that the IMF had been overoptimistic in its growth forecasts for the developed world, asked if they were likely to get it right this time.

A good question, the obvious answer being “no!”

The IMF forecasts, though having proved over-optimistic in six of the past seven years have not been hopelessly incorrect.  The global economy rarely moves in lurches, though when it does as in 2007, hardly any forecasting model picks it accurately.   The table below looks at the IMF’s GDP forecasts (per cent change) a year ahead and the outcomes.

imf1

It is a reduction in investment in the developed world that marks out the period since 2006.  Pre-recession, some 23 per cent of developed countries’ GDP comprised investment but this level has fallen to around 20 per cent since.  A drop of this size is important because most investment only replaces existing assets.  And it is also likely that more of the current investment has been allocated to sub-optimal venues like government infrastructure as well as the worthless renewables that have sucked in $18 billion in Australia alone.  By the same token we are seeing the scrapping of investment in industries like aluminum smelting, with high labour productivity.

The relative lack of investment is underpins the causes for the sluggish economic growth in the developed world.  Most economic models like most economists see the future in Keynesian terms with a splash of Friedman’s monetarism.  In these models, growth starts with new spending by consumers stimulated by an increase in money supply or an increase in government spending.  This, so the story goes, leads to increased demand and firms start gearing up investments which brings further increases in demand while at the same time facilitating increased production to supply the demand. If that ever worked it surely is not working now – productive capacity to supply the goods and services is inadequate.

And into this Brave New Cauldron we have the G20 which is said to want to adopt policies that will lift growth by two per cent. But budget deficits, though being reduced, show no sign of shifting to surpluses; government spending has fully absorbed the loss of GDP share from investment.  And the people pulling the economic levers can engender little confidence:

  • In the US, we have a leading Keynesian economist in charge of the Fed and a President who is totally ignorant about how economies grow.
  • In the EU, ECB President has renewed his pledge to boost inflation by increasing demand through the money supply
  • And in Japan, Abeconomics prevails – two suicide arrows (fiscal stimulus, monetary easing) and a third (structural reforms) which never leave the quiver.

 

http://www.theaustralian.com.au/business/opinion/will-imf-get-it-right-this-time/story-fnp85lcq-1227083365855

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7 Responses to The never ending recession

  1. Zippy The Younger

    Obama looks sad

  2. Bruce of Newcastle

    The IMF forecasts, though having proved over-optimistic in six of the past seven years have not been hopelessly incorrect.

    Hmmm:

    Tuesday Humor: Charting The Progression Of IMF Growth “Forecasts”

    Hilarious Charts Of The Day: IMF’s “Growth Forecasts” Over Time

    IMF Comedy Hour: The Complete History Of The IMF’s Growth “Forecasts” Since 2012

    Ok, ZH is feral like a cross between possums in Kiwiland, lantana and ebola, but on this they do have form. Christine Lagarde is like a cross between possums in Kiwiland, lantana and plague. Couldn’t they find someone to run the place other than an ethereal Frenchie from a Keynesland theme park?

    Also she seems to like hockeysticks. Kinky.

    Perhaps they might wish to try something different, like remove red and green tape, lower business taxes, destroy the unions and corral bureaucrats into a cattle farm somewhere and humanely and gently put them down*, and release the animal spirits. It’ll work, but first you have to accept that capitalism craps all over the alternatives. Which is a hard thing for Marxists to digest.

    * Not a death threat.

  3. Mk50 of Brisbane, Henchman to the VRWC

    Alan, this may well be the least of our worries. If a cycle of great power wars kicks off due to the growing international instability, then the kimchee will be much deeper.

  4. JC.

    Alan

    This is one of the few times I disagree with you. The Fed chair wasn’t a bad pick at a time when the US economy is growing below par brought on by tight monetary policy. The same applies to the EU and Japan. Rates never tell the story whether monetary policy is tight or loose by the interest rate alone. In fact Friedman argued correctly in my view that very low interest rates indicate very tight monetary conditions and very high rates suggest policy looseness in the last. He’s right.

    There’s no inflation problem in the West at the moment. In fact the opposite in the case.

  5. JC.

    Through I good part of last week I was flabbergasted that the US market was hit hard with the reason being that the IMF had lowered its global growth projections going forward. This was the outfit still forecasting growth and inflationary problems even after Bear Stearn went down with the ship…. even a few months after.

    The IMF is worse than useless.

    I don’t think there’s any expectation for the IMF or anyone else to pinpoint the exact rate of growth but at the very least they ought to be getting the general direction right. For the most part the IMF can’t even do that.

  6. johno

    The IMF runs the real risk of making Green activists climate forecasts look realistic! 🙂

    That’s a massive achievement.

  7. 2dogs

    Pre-recession, some 23 per cent of developed countries’ GDP comprised investment but this level has fallen to around 20 per cent since. A drop of this size is important because most investment only replaces existing assets.

    Much of the new investment has gone to the developing world. Given that a main driver of incomes is the value of the capital the worker works with, this should mean greater equality between developed and developing nations in future.

    Capital started flowing to the third world because the GFC meant the developed world lost much of its reputation for capital safety, and investors, realising they would have risk anywhere, decided they may as well chase returns.

    The bottom line is that we are in for lower growth for a long time yet.

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