Tuesday, June 30, 2009

Is the Recession ending soon? If so, then what?

Annie Lowrey presents a very interesting article on the state of the world economy in Foreign Policy. It consists of a short summary of what is happening and expected to happen in China, Japan, Africa and the United States and links to seven interviews with economic experts familiar with various parts of the world.

Let me summarize Annie Lowrey's summary found on the first page:
  • China China has seen a sharp drop in exports and as a result, a sharp drop also its rapid internal export-fueled economic development. Their economy is being maintained by stimulus, but that can't go on forever. This is not a surprise to them, so the worldwide Recession is actually an opportunity to shift out of the export-fueled economic growth into something more sustainable. Since China expects to come out of the Recession in better shape than the rest of the world, that is going to give them the opportunity they needed to shift to a more sustainable economy.

  • Japan With its essentially export based economy slowed by the drop in exports of its major high tech products, which have fallen out of favor with Japan's customers and potential customers, Japan has seen a 10% reduction in the overall economy. The move into the Recession has slowed, perhaps stopped, but there is no apparent engine of growth for them in the future.

  • Africa The economy of the world's poorest continent has been based largely on aid, investment, and commodities. All are being reduced by the Recession, with no prospects seen for recovery of those items or replacements for them. Internally because their banks were not as integrated as in the west, they did not see the bank failures, so Africa has been economically devastated.

  • The United States The dropping GDP that signals going into the Recession appears to be slowing, so the Recession is expected to reach the bottom, perhaps as early as this fall. How long the economy will remain at the lower level is very uncertain, being "variously described variously as "a curved L," a "Q," and a "U" -- not a real "V"." In short, things are getting worse more slowly, but the prospects of actually getting better any time soon are unlikely.
The article appears to present a realistic picture of the overall world economy. It's interesting that Lowery in her summary provides a lot more details of the internal situation for China, Japan and Africa than she does for the United States. Perhaps the many structural problems in the U.S. that make it at present an unstable economy are too much for her to find anyone to briefly deal with. Though perhaps she does not summarize it because there is no consensus regarding either what those structural weaknesses are or how to deal with the structural problems like the weak American financial sector. Meltzer, I think, has it right. "...we're going to have to export more to service debt we've sold and going to sell. Consumption growth has to slow down. We have to invest more to export more." In other words, the U.S. has to return to being a nation that produces and exports thinks and stops letting the financial sector tail wag the economic dog. To do that, the greed and arbitrariness - as well as most of the so-called "innovation" - has to be removed from the financial sector. Wall Street banks are going to have to become a utility useful to a manufacturing economy again, instead of being the powerful Gods wielding lightening bolts of money who determine which businesses and industries survive and grow and which ones die.

Lowery does not tell why there is no significant discussion of the European block (Edwin Truman briefly mentions it), Russia, or Latin America. That could be because those areas are not going to either further depress the world economy nor are they going to provide any engine for its recovery. Or again, she simply may not have been able to find an acknowledged expert who would summarize the common wisdom on those areas. Or maybe just a space limitation for the article., and they were the least consequential. In any case, it would have been nice to know why Lowery did not address them.

The picture Lowery presents is that the drop into the Recession will soon reach the bottom but that recovery any time soon after reaching the bottom is uncertain. China expects to lead the world when that recovery does occur. It's just very unclear how long the time period of that "bottom" will last. The level of the "bottom" itself is right now artificially dependent on national stimuli, and that stimuli cannot continue for a long period of time. Yet no one knows what can replace those stimuli payments provided by the various national governments. (Or at least none of her respondents are commenting on those prospects.)

The interviews with the experts are short, essentially bullet points for question with a brief answer. They are worth reading individually. Links to the seven interviews Lowery is presenting are here:

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