Global Growth Outlook Plunged in February

February 9, 2009

Each month a survey is taken and published in The Economist of forecasters’ real growth projections. The progressively gloomier mean forecast for GDP expansion in 2009 over the six months between August 2008 and February 2009 documents the rapid unraveling of the global economy. The biggest step downward in expectations occurred in the latest month, undermining the contention that a turn for the better or even a semblance of bottoming out will occur as soon as the summer quarter. Projected GDP in 2009 is shown below for the G-7 members plus Australia.

Survey Month U.S. Ezone Japan U.K. Canada Australia
Feb 2009 -2.0% -2.1% -3.2% -0.9% -0.7% +0.3%
January -1.2% -1.4% -1.4% -1.7% 0.0% +0.8%
December -1.0% -0.9% -0.9% -1.4% +0.1% +1.1%
November -0.2% -0.1% -0.1% -1.0% +0.5% +1.9%
October +0.6% +0.6% +0.6% +0.1% +1.4% +2.3%
September +1.3% +0.9% +0.9% +0.6% +2.0% +2.6%
Aug 2008 +1.2% +1.2% +1.2% +1.0% +1.9% +2.7%


Monthly first differences, that is the latest month’s forecast minus the forecast from the preceding month, provide a measure of how rapidly the outlook has worsened. The first differences are all negative in February, ranging from -0.5 percentage points (ppts) in the case of Australia to -0.7 ppts for Euroland and Canada, -0.8 ppts for the United States, and -1.8 ppts for Japan.  The combined 5.4 percentage point-drop for the six economies, averaging -0.9 ppts apiece, surpasses November’s 4.6 ppt decline, December’s 4.0 ppt decrease and January’s 1.7 percentage point fall. The 1.8 percentage point drop from minus 1.4% to minus 3.2% for Japan was only the second instance exceeding a 1.0 ppt deterioration in the matrix above and was considerably worse than Britain’s 1.1-ppt decline to 1.0% in November from +0.1% projected in October. Between August and February, Japan (down 4.4 ppts) had the biggest drop even though its banks had fewer toxic assets after their own bad debt purge several years earlier. Britain (-3.6 ppts) and Euroland (-3.3 pts) saw similar markdowns in expected growth, as did Canada (-2.6 ppts) and Australia (-2.4 ppts).  The United States, where the crisis began and where the biggest and earliest decline of short-term interest rates was engineered, had the smallest drop (2.0 percentage points).

Over the six months since August 6th, the dollar appreciated mostly, with the notable exception of a 16.5% net drop against the yen. Exchange rate strength has clobbered Japanese growth, neutralizing the advantages officials in Japan thought they had during earlier stages of the crisis. The field of foreign exchange attracts many sports enthusiasts both as dealers and policymakers. A tendency exists to think of a strong currency like a team that is in first or second place and a depreciating currency like a team that is near the bottom of the standings. I recall in my first stint at the New York Fed’s Foreign Desk being asked by the head trader, “Whose team are you on?” after making a positive observation about a drop in the dollar.  The fact is that there are times when it is advantageous to have a depreciating currency and other times when a rising currency is better. It depends on context. Sterling’s ouster from the old ERM joint float in September 1992 was humiliating for the government but the best thing that happened to the British economy in the last 20 years, as it set up many years of stronger growth that typically experienced in the rest of Europe.

The strengthening yen could not happen at a worse time for Japan but is unlikely to reverse itself quickly. A separate article in the latest issue of The Economist charts the yen’s inflation-adjusted trade-weighted value against a basket of other currencies, showing that the yen had in fact been very undervalued and has only corrected that prior disequilibrium. Although back near fair value, the correction of the yen is being associated with a pronounced deterioration of Japan’s external imbalances.  That cause-and-effect illustrates the fact that economic behavior is affected by both the levels of determinant factors and by recent change in those levels.

Copyright 2009 Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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