Expected Long-Term Economic Growth in Selected Advanced Economies

March 8, 2010

This is the time of year when forecasters first wheel out projections for the next calendar year.  Since over nine months remain before the period begins and more than 21 months remain before it ends, the forecasts are good proxies for estimates of long-term trend growth.  One sense of consensus forecasts is published each month by The Economist, which surveys sixteen big economics shops, and the Economist survey in March of each year is the one that replaces the prior calendar year with the next calendar year.  So while last month’s survey contained consensus forecasts for 2009 and 2010, this month’s survey has the years 2010 and, for the first time, 2011.

The March surveys taken in 2004 through 2008 were not not influenced by the Great Recession.  Although the financial crisis began in August 2007, analysts had not grasped the severity of the ensuing recession when the March 2008 survey was conducted.  The rescue of Bear Sterns by J.P. Morgan was about to happen.  The average of projected out-year growth in the five consecutive March polls (2004 through 2008) illuminates what analysts assumed to be long-term trend growth.  Not surprisingly, forecasters were most optimistic about the United States (2.9%), Canada (3.2%) and Australia (2.8%), while lower inferred long-term growth rates were associated with Britain (2.4%), Euroland (2.0%) and Japan (also 2.0%).

The Economist March 2009 survey was taken during the severest part of the Great Recession, and the extreme pessimism of a year ago was reflected in projected 2009 growth rates, which were negative 5.3% for Japan, minus 3.1% for Britain, minus 2.4% for the euro area, minus 2.2% for the United States, minus 1.6% for Switzerland, minus 1.5% for Canada and minus 0.3% for Australia.  The implosion of activity in late 2008 and early 2009 was large enough to depress forecasts of likely growth in 2010 as well.  However, the deviation of projected 2010 growth a year ago from the average out-year estimates in the five previous March surveys was smallest in the case of the United States, a sign that analysts considered the U.S. economy to be more resilient than others.  The table below compares pre-crisis presumptions of long-term growth (that is, the average of out-year projected growth in the March surveys taken in 2004 through 2008) with projected 2010 growth in the March 2009 poll.

  U.S. Ezone Japan U.K. Canada Australia
2010-f 1.9% 0.7% 0.5% 0.5% 1.7% 1.6%
2005-9 2.9% 2.0% 2.0% 2.4% 3.2% 2.8%


In the March 2010 survey, U.S. projected growth in 2011 is 2.9%, fully back to its perceived pre-crisis trend level.  Four of the other five above economies show an incomplete return to complete normalcy.  America’s northern neighbor, Canada, is expected to experience a 3.0% expansion of real GDP in 2011, two-tenths less than the average out-year forecast for 2005-9.  Expected British growth next year of 2.1% lies three-tenths below its old long-term trend perception.  Japanese GDP is forecast to rise 1.6% next year,four-tenths of a percentage point lower than trend, and Euroland growth is penciled in at 1.4%, six-tenths of a percentage point less than trend.  Note that projected U.S. growth next year is roughly twice as great as what analysts are assuming about Japan and the euro area.

Analysts are even more optimistic about Australia, which narrowly escaped recession, than about the United States.  Projected Aussie growth in 2011 of 3.4% is a half percentage point above the estimate for the United States and six-tenths of a percentage point greater than the 2.8% pre-crisis notion of long-term trend growth in Australia.

A final point of interest surfaces when one compares expected 2010 growth rates now to estimates for the present year that were made in March 2009.  All of such have been revised upward, indicating that the Great Recession ended more quickly than assumed.  The upward revisions were sharpest in the case of Australia (1.3 percentage points, or ppts, to 2.9%), the United States (1.2 ppts to 1.7%), and Canada (1.0 ppt to 3.0%).  In the other instances, projected 2010 growth was revised up by 0.8 ppts to 1.3% in Britain, 0.6 ppts to 1.3% in Switzerland, and 0.5 ppts to 1.2% in Euroland.

Currency market trading is full of myths, some based in fact and others in fancy.  One of the latter rules of thumb declares that currency strength correlates positively with actual growth and even more closely with projected growth.  The United States was perceived as a faster-growing economy during the noughties and retains that advantage to the same degree as before.  However, the dollar trended lower last decade, as it did in earlier decades.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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