One of the most interesting “boxes” in the IMF’s World Economic Outlook (in Chapter 1) is the one entitled, somewhat innocuously “Global Business Cycles”, by Marco Terrones, Ayhan Kose and Prakash Loungani at the IMF. Yet, it’s important to read until the ending paragraph:
To summarize, the 2009 forecasts
of economic activity, if realized, would qualify this year as the most severe global recession during the postwar period. Most indicators are expected to register sharper declines than in previous
episodes of global recession. In addition to its severity, this global recession also qualifies as the most synchronized, as
virtually all the advanced economies and many emerging and developing economies are in recession.
The authors are to be commended for simultaneously analyzing the data for numerous countries (not easy, as anybody who’s tried this knows!) and applying a systematic procedure for dating the troughs and peaks.
From my perspective, the graphs easily summarize the main points.
Excerpt from Figure in Box: “Global Business Cycles,” IMF WEO April 2009.
Excerpt from Figure in Box: “Global Business Cycles,” IMF WEO April 2009.
Excerpt from Figure in Box: “Global Business Cycles,” IMF WEO April 2009.
Related to these indicators related in the Box is the IMF’s view of the world output gap. As Econbrowser readers know, I think the output gap is another important indicator — despite the imprecision associated with such estimates — of economic distress. Here’s the relevant graph:
Excerpt from Figure 1.9 from IMF World Economic Outlook, April 2009.
This, along with the fact that according to Case and Shiller, housing prices remain way too high, is the scariest thing about the current situation, despite the various “green shoots” that seem to be appearing in some places out there.
Interestingly, the IMF seems to be forecasting a V-shaped recovery, apparently in late ’09 or ’10.
I would think such a recovery would have to happen sooner. If durable goods production and international trade stay at current levels for much of the balance of the year, I can’t see how it wouldn’t drag down employment much farther.
Imagine what things would have been like without decoupling?
My issue with the concept of output gap is that people seem to forget that capacity can be easily destroyed and potential can sink as fast as actual. For example, if one truly believe that financial intermediation is important to our economy, shouldn’t one revise down the potential significantly with the current mess in our financial system? Why the changes in potential so small?
I see amenic growth for many quarters …
It’s true that the economies were coupled and they all went down together; however, I believe that Asian economies will “decouple” to some extent by growing sooner and faster than Western economies.
I am indeed amazed by the IMF’s V-shaped GDP recovery projections: Positive GDP growth by January 2010, recovery to pre-recession GDP growth by January 2011…
Forgive me my skepticism… How will credit be extended when TOTAL CREDIT DEBT to GDP in the US is in excess of 350%? What is going to cover credit losses in real estate and commercial paper? Why would anyone have confidence in a banking and finance system that has shown itself to be incompetent and fraudulant?
Don’t hold your breath for any real recovery until the Obama administration (or its successor), develops the cojones to break-up the money center bank cartel and its death-grip on government and the economy.
Losses must be recognized before there can be a recovery.
It might be the unprecedented need to shift capital to emergent economies and risk averseness while investors hope to find some new bubble in developed economies that is causing such big dip. There is a structural change coming, people like to avoid it since it involves more risk, less predictability. But sooner or later it has to be done- the unsatisfied demand is in the emergent markets, and its huge.
Hello Prof. Chinn,
I find that the IMF’s output gap graphs once again illustrate the conceptual problems surrounding these output gaps. Is the IMF’s potential output forecast simply reflecting the IMF’s forecast for a real GDP growth slowdown, as one would find by applying a HP-type filter to the GDP data, or is there a rationale for a long-run (non-cyclical) decline in the labour force and/or productivity growth?
Menzie,
I hope I do not get waterboarded (its a shame to live in this country), when I tell you :
The IMF reports always tell you stuff, everybody knows already. Oh yes, bad times …
On tues when IMF Deputy MD John Lipsky spoke at AEI. they announced their G20 blessed aid plan to some scepticism on actual dollars. But the big question now is why trade finance collapsed. This specialized form of finance with letters of credit and shipments as collateral is essential to trade, especially emerging countries. the data are horrifying for total cross border lending: emerging asia down more than half. Did trade or finance fall first? the exsperts say it was at least partly finance.
This could be example number 19 where liquidity measures, in this case IMF BoP support, dont actually get bank lending going again
Every time I see graphs regarding this stuff it’s petrifying. The spikes/troughs for this latest cycle are such outliers.
I think the GFSR chapter 1 figure 1.2: Heat map is very interesting but almost ignored by anyone. When everyone is now agreeing that recoupling is the right theme, that figure 1.2 gives some insight. The recoupling only happen under the extreme (when all measures are red). Even before Oct 08, when most of the indicators are red, EM is still in the green/yellow zone. More interesting is now, when all indicators are in red, EM is turning back to orange. So, if we take this picture literally, decoupling most of time except the 7 SD away from normal?
The coupling/decoupling dichotomy surely resolves around whether the EM economies relied fundamentally on an internal or external dynamic for their growth. External to them that is i.e. dependent on the West.
The evidence of the ongoing Chinese recovery, underestimated by the IMF in my view, suggests that decoupling indeed exists, albeit qualified. There is after all one world economy.
The problem is the Chinese were attempting to slow their economy in the summer of 2008, so when Lehman’s fell and after it trade and output, there was a very nasty recession. From November onwards however, the Chinese have reflated their economy to a really unprecedented degree when combining state and semi-state expenditures.
The recession is over there.
Which poses another question for decoupling/coupling thesis, will it be strong enough to drag the West out of its mire?
With about half of Chinese growth due to exports it is hard for me to understand why anyone believed in decoupling in the first place.
bill j – I’d suggest that you read the following article by Michael Pettis about China’s emergence from the recession…. …declare-the-crisis-over
Thanks have done. Actually its more like 20% of China’s growth from exports.
But if (when) China revives this year and the West remains stagnant, does that mean the world is re-de-coupled or just de-re-coupled?
bill j – I would say we’re Chimerica, and we’ve been increasingly joined at the hip year after year since the late 70’s. I say that China wants US sales, and will play any game that results in a trade surplus. China will do so until the average Chinese citizen achieves Taiwanese or Korean standards of living… Roughly US $26 Trillion GDP (at 2008 Korean GDP/cap).
I am certain that much of the Fortune 500, is utterly dependent on Chinese components for the near term. It will be interesting to see when a significant number of value added Chinese products will be directly marketed into the US, and when Chinese businesses start to compete with American and European multinationals. It will be even more interesting to see when the renminbi will start to displace the dollar in world trade.
Barkley Rosser wrote:
This, along with the fact that according to Case and Shiller, housing prices remain way too high, is the scariest thing about the current situation, despite the various “green shoots” that seem to be appearing in some places out there.
Barkley,
Do you think that this could be due to efforts by Treasury and the FED to prop up prices or is it just a natural consequence of the business cycle?
There are two main points that have to be addressed when looking at the potential for an increase in the output and GDP gaps for OECD and emerging economies. First, is whethere there is a decoupling effect present. The second is whether the economy fits into the traditional emerging market economy or a new hybrid based on globalization.
First, if there is a basis for decoupling or at least a freeing of the emerging market economy, it may not correlate with the global trends in the future and may not suffer reduced output.
Second, there may be a basis for a hybrid economy that is capable of not suffering the effects of the OECD countries based on insulation from the financial crisis in OECD countries.
The financial sector crash potentially stands to drastically affect nearly every economy in some form or another, however, to what extend is extremely difficult to say with the pace of global shocks moving at a rapid pace.
The post entitled The Great Recession Goes Global, has generated a fair amount of talkback over the issue of decoupling. The post summarizes some of the graphs and analysis of the recent IMF World Economic Outlook which notes that the 2009 forecasts of economic activity, if realized, would qualify this year as the most severe global recession during the postwar period. The IMF authors also write that this global recession also qualifies as the most synchronized, as virtually all the advanced economies and many emerging and developing economies are in recession. In response, econbrowser readers have posted numerous comments about the issue of decoupling and whether, in light of IMF data on synchronicity, we are actually experiencing a period of decoupling.
I was surprised to see that among the well-reasoned responses to the post, no one has made a distinction between real versus financial decoupling. Some posts have argued that we are not significantly decupled on account of Chinas reliance on exports, while others said the IMF projection would be much worse if we actually were coupled. The nuances regarding the types of decoupling are absent.
What is especially interesting in the IMF report is the issue of synchronicity, especially considering all of the hype around decoupling. Do the similar trajectories of emerging and advanced economies suggest that decoupling is a myth?
I do not think so. The explanation lies in the nuances of decoupling. While real decoupling is occurring and regional and group-dynamic business cycles are playing a more active role, financial decoupling is a different story. The strong integration of global financial markets and the financial character of this recession help explain the synchronicity and potency of the current financial crisis.
The trend over the past decade has been for countries to more fully integrate their financial markets and increase financial flows. Financial market integration, in which foreigners and countries (sovereign wealth funds) can increasingly own equity in different countries, makes synchronicity more likely. When financial markets take a hit, the repercussions reverberate quickly.
Research done by A. Kose on Recessions, Crunches and Bursts demonstrates that recessions that involve credit crunches and housing price bursts are on average longer and deeper than other recessions. That both the crunch and the burst are present in the current environment is reflected by the IMF research, which describes this crisis, if IMF projections are realized, as the most severe global recession during the postwar period. The financial character of this situation, in which credit markets are tight, is having both a stronger, and more synchronous affect. Declines in total factor productivity, supply shocks or other economic events might not induce as synchronized as response as financial events.
To summarize, it is important to consider the type of decoupling we are referring to in the discourse surrounding the synchronicity of this recession. Although group-dynamics may be replacing real decoupling, financial decoupling is a different story. With markets more integrated than before, the synchronicity of this recession is consistent with current trends. In addition, the consequences of this recession are made all the more potent given its financial character.