L, U or V?

MANILA, Philippines–True to form, economists can’t agree on the likely shape of the recovery from the current global economic downturn precipitated by the US financial meltdown. The most pessimistic see an L-shaped trend, implying that the world economy will be lingering at the bottom for a long time. The more sanguine see just a year or two at most of difficulties, but a strong rebound thereafter—a U-shaped trajectory for economic output. The most optimistic see an immediate bounce back, with the graph looking like a V. The proponents of each scenario all sound convincing when they explain their respective reasons why they expect it to be L, U or V. What they are ultimately projecting is the pace of recovery in the US economy, on which hinges the recovery of the rest of the global economy. So which prognosis are we to believe?

Decoupling

The debate comes in the midst of snippets of business and economic news that have been called “green shoots” (as in the first emerging plant shoots of spring) by US Fed Chair Ben Bernanke and “glimmers of hope” by President Barack Obama. But these mostly refer to data indicating that the rate of decline in certain economic indicators has been slowing—but they continue falling nonetheless. Also alluded to are recent announcements by some large US banks of positive net incomes in the first quarter, but which were quickly dismissed by observers to be the result of accounting technicalities.

Closer to home, the news hasn’t been quite as bleak, except in export- and financial sector-dependent economies like Japan, Singapore and Thailand, which is also troubled by political turmoil at this time. Korea managed to eke out 0.1-percent growth, China 6.1 percent (admittedly much slower than the 10-11 percent it had lately been accustomed to, but nonetheless still a brisk growth rate), and most other East Asian economies still anticipate positive growth amid the large negatives showing up and expected in the West. Some point to this divergence as proof that Asia is “decoupling” from the major economies led by the United States. And if it is indeed true that Asia’s economies no longer need the US and European economies to grow in order to grow themselves, then there is more that we Asian economies can do among and within ourselves to stave off significant contraction in our economies.

Ruling out V

A V-shaped recovery implies an immediate bounce back of the US and European economies, something few analysts expect to happen in this particular crisis episode. The current situation is often likened to the Great Depression of the 1930s, which most people see to have been marked by prolonged inactivity in those same economies. But I have heard at least one economist point out that closer scrutiny of the data would, in fact, show a V-shaped recovery in industrial output from its bottom point even at that time—except that the graph dipped again later to assume what looked more like a W shape.

But industrial output is one thing; prolonged high rates of unemployment and general economic hardship is another, and the Great Depression was generally remembered for that. Bernanke’s “green shoots” have most recently been negated by bad news on the things that really matter: The US economy lost another 663,000 jobs last month, and retail sales fell 1.1 percent in March after three months of positive growth. A total of 5.1 million American jobs have been lost since the 17-month-old recession began, and the more Americans lose their jobs, the less consumer spending there will be. And in the United States, often accused of “overconsumption” because that component has accounted for over 70 percent of its total production, consumer spending is ultimately what would spell the economic recovery—and nobody expects a V-shaped rebound there.

Looking east

That is why many are looking to Asia to propel the recovery in the world economy. While the Americans have been accused of excessive consumption, Bernanke ruffled not a few feathers when he blamed their woes on Asians’ “excessive saving”—because it ultimately financed Americans’ overconsumption. But can Asia’s economies really lift up the global economy as a whole?

US President Obama went to the recent G-20 Summit in London hoping to get wide agreement on a coordinated fiscal stimulus that would have governments of the world’s major economies spend a lot more than usual to boost the world economy. And that, indirectly, was expected to boost the most troubled economies now, namely the United States and Europe.

But here’s the reality check: US GDP is more than $13 trillion, Europe’s is over $12T, Japan has $4.2T, China $3.2T, Asean $1.4T, and India $1.2T. The total GDP of Asia combined is just over a third of America’s and Europe’s combined. Even if all of Asia stopped saving altogether, it would hardly make a dent. In the end, the compelling implication is that the United States and Europe need to fix themselves up, if the world economy is to get back on its feet. And from where I stand, I cannot see a V-shaped recovery happening in these economies.

Some worry that what American officials think to be the light at the end of the tunnel is actually the headlight of an oncoming train. –Cielito Habito, Philippine Daily Inquirer

Comments welcome at chabito@ateneo.edu