New Growth Forecasts From the OECD

March 31, 2009

The Organization of Economic Cooperation and Development, headquartered in Paris, has 30 members.  All of the G-7 (U.S., Japan, Germany, France, Britain, Italy, and Canada) belong to the OECD, which also includes 14 other Western European nations, 4 Eastern European countries, Australia, South Korea, Mexico, Turkey and New Zealand.  The table below presents the new fourth-quarter on-year growth forecasts for the calendar years 2009 and 2010, the quarter with the greatest projected contraction of GDP, the first quarter that’s likely to see positive growth and, most importantly, the projected cumulative drop in GDP in the eight quarters between 4Q07 and 4Q09.

GDP OECD U.S. Euroland Japan
Worst 4Q08 1Q09 1Q09 4Q08
First Positive Quarter 1Q10 1Q10 1Q10 2Q10
4Q09-f -3.4% -3.5% -3.5% -4.4%
4Q10-f +1.1% +1.1% +0.8% +0.4%
4Q09 vs 4Q07 -4.8% -4.3% -4.9% -8.5%


I draw two main observations from the OECD forecasts.  The first is the similarity of the projections for the United States, Euroland, and the 30-country bloc as a whole.  Market participants have lately been consumed with what regions are doing best and who is likely to recover soonest.  The OECD forecasts suggest that such distinctions amount to an exercise in splitting hairs.  Business cycles are pretty homogeneous, and even Japan is projected to follow a similar path but with somewhat weaker growth throughout.

The other highlight relates to the severity of this recession.  The peak-to-trough declines are all less than 10%, a threshold used by some to delineate recessions from depressions, but Japan gets close to that standard.  The Japanese “lost decade” bore little resemblance to severity of the above profile.  From an onset in the spring of 1991, Japan’s worst end-year to end-year sequence consisted of negative growth of 0.3% between 4Q96 and 4Q97 followed by -1.7% in the year to 4Q98 and -0.2% in the year to 4Q99 — in other words negative 0.7% per annum during the three years between the final quarters of 1996 and 1999.

From a different perspective, however, Japan’s trauma was more severe than what analysts are now considering for the world economy.  Japanese real GDP had expanded 4.0% per annum over the ten years prior to the onset of the “lost decade,” which in fact represents a longer period than  a decade.  During the sixteen years to 4Q07, Japanese GDP grew at an average annual rate of 1.1% on balance, 2.9 percentage points below its previous norm.  That loss of 2.9 percentage points of annual growth for sixteen years represents a cumulative shortfall of 58% against the theoretical size of Japan’s economy if it had continued to expand around 4% per annum through the 1990’s and the present decade.  In other words, the size of Japan’s would have been more than half as much larger than it is at present without the sharp and sustained shift to lower growth that was experienced.  In the long run, the severity of the recession may be less meaningful than the nature of economic growth in the subsequent recovery.  The second factor, for example, will determine if fiscal deficits can be reined in or not.

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



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