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Monday, November 25, 2002

The Economic Future According to the OECD

The Organisation for Economic Co-operation and Development forsees only a slow and irregular global recovery in its latest economic outlook. According to the Economist, policymakers are finding life difficult in part because they relaxed too much in the 1990s.

As the OECD acknowledges, most economic upturns are uneven in the months directly after recessions have ended. But the latest report points out one unusual feature of the rather weak pick-up in activity this year: the coincident fall in share prices around the world. Equity markets have continued to weaken even as most economists concluded that the worst was over in America and Europe. In America, the drop in share prices since the recovery began at the turn of this year is the first such fall in any of the 18 economic recoveries since 1912. That is more than just another interesting statistic. Falling share prices undermine corporate and individual wealth and could in turn weaken economic activity. Business investment is already weak—the accounting and other corporate scandals in America have done little to help there—and if consumers start to lose heart as well, recovery could stall, and might even go into reverse.

Another unusual feature of the global recovery, which follows the first worldwide downturn for more than a decade, is its apparently divergent nature. The OECD does not think this is a cyclical phenomenon—ie, simply a matter of different regions being at different stages of recovery. It reckons that structural differences explain the different pace of the upturn in different parts of the world—and that, in particular, the potential for future growth in America is considerably greater than in other parts of the world. If this analysis is right, policymakers in Europe and Japan should be worried.
Source: The Economist

Well, five out of ten for the Economist. They've got it half right. These statistics are disturbing, and we should be worried. But they don't offer much in the way of explanation as to why this should be happening. They argue for structural reforms, fair enough, we could do with some. But put the problem another way. In the last quarter of the twentieth century economic growth went on more-or-less OK, without these structural reforms. So why the urgency now. Why is Japan down, and Germany sickly. Here there is silence. The deflation danger. Yes but why deflation, and why now. Here the analysis is thin. I am not convinced we have got anywhere near to the bottom of this one, yet. (No pun intended).

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