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the coming economic downturn « Previous | |Next »
April 11, 2008

In its latest World Economic Outlook the International Monetary Fund says that a recession in the United States is now inevitable and that there is a 25 per cent chance of a global recession. The IMF estimates total global losses from the deterioration of credit as of March at $945bn, and it says that the global economy is caught between the twin perils of a sharp slowdown in activity and rising inflation

A global recession is a change of tune from the usual boosterism from the IMF.Doesn't that make a mockery of the recent stock market bounce and the notion of global economic decoupling? A big U.S. recession will certainly drag down growth in China. Will things going pear shaped cause commodity prices to slide---- by 20% to 30 say--- and so hit Australia along with Canada? Is this possible?

Easter.jpg Bruce Petty

I see that Treasurer Wayne Swan has changed his tune. He is now saying that a recession in the US would affect Australia and that it could well have a fundamental impact on Australia's two fastest-growing customers, China and India. The decoupling thesis is being revised.

So what does a big U.S. recession mean? For the IMF it will be a mild recession. But they have a record of turning a blind eye to the systemic flows in the US economy and financial system, have been missing in action for some time and are trying to gain some credibility as the right body to co-ordinate the global response to the current crisis.

Do Swan, the Australian Treasury and the RBA follow the IMF? What will Swan say after visiting Washington? Or will the economic troika adopt the perspective of a short, sharp downturn with a speedy recovery in the US as part of their 'China's economic boom protects Australia' line. They are part of the set who were last year telling us that all was enduringly rosy, and who have have tended to move towards the short sharp interpretation of the forthcoming downturn in the US. Wall Street will shred lots of jobs and the investment crowd will be driving New York cabs etc etc.

The issue is: how severe will the recession in the US be?

Nouriel Roubini, who argues that the US is experiencing its most severe financial crisis since the Great Depression, says in this post that:

My view is that a protracted economic stagnation – bordering on an economic depression – is unlikely in the case of the US as the policy response of the US is already more aggressive than the one of Japan. Japan waited almost two years after the bursting of its bubble to ease monetary policy; and it waited two years before providing fiscal stimulus. In the US, instead, both monetary and fiscal stimulus have started in earnest early on. Also Japanese postponed the necessary corporate and banking restructuring for years keeping alive zombie firms and zombie banks via inappropriate forms of forbearance. In the US both private and especially public efforts to restructure the impaired assets and firms will start faster and more aggressively. Thus the risk of a decade-long economic stagnation is quite limited so far.

Roubini's scenario, which is a severe recession lasting 12 to 18 months, a severe financial crisis and credit crunch, is not your typical run-of-the-mill recession.

| Posted by Gary Sauer-Thompson at 7:29 AM | | Comments (3)


Don't be led by anything Wayne Swan says. He's struggling to say anything intelligent. His metier was best served when he donated money to his opponents to help out with printing expenses up there in beautiful Queensland.

Swan is still basically repeating economic mantras about economic policy based on briefs from Treasury and the RBA.

It is odd that he has said nothing about Australia's regulatory framework in relation to stockmarket mayhem. The implication of the silence is that Australian Securities Exchange (ASE) and Australian Securities and Investments Commission (ASIC) are the best in the world and that there is no need for reform. Australia is the centre of best practice etc etc despite the anxiety of investors.

Swan is not even floating ballons to start up a public debate about regulation of financial markets. Does this imply that there is no need for regulation and that we will continue with the insistence that these markets are self-regulating and must not be tampered with?

I see that first home buyers in England are being warned to stay out of the market for 18 months.