|Fears grow about aglobal recession. What exactly does that mean? |
THE list of sickly economies is growing. In the year to the second quarter, America's GDP growth slumped to its slowest rate for almost ten years. Japan's GDP probably fell for a second consecutive quarter; its industrial production plunged at an annual rate of 17% in the first six months of this year. German business confidence has fallen to its lowest for five years. And several emerging economies, including Mexico and Singapore, are already in outright recession.
Although America is having a hard landing, it has so far escaped an official recession, defined as two consecutive quarters of falling GDP. But is it possible for the world economy as a whole to suffer a recession without America actually going under? The answer depends on what you mean by “recession”.
Global industrial production fell at an annual rate of 6% in the first half of this year, the sharpest dive in two decades. But global GDP growth has remained positive, and most economists still forecast global growth of at least 2% this year. So why the talk about a world recession?
In an individual economy a recession involves a fall in GDP. The world, by that definition, has not suffered a true recession since the 1930s: a slump in the United States, say, has always been offset by growth elsewhere. The years 1975, 1982 and 1991 were all deemed to be world recessions, yet, according to figures published in the IMF's World Economic Outlook, global GDP grew in those years by 1.9%, 1.2% and 1.4% respectively.
Cynics might say that in all three years America was in recession and that Americans think they are the world. Nevertheless, there is a good reason to define these years as global recessions—a reason that exposes the flaws in the traditional definition of recession in a single economy. Suppose an economy has a long-term sustainable growth rate of 1.5% (for example, Japan today) and GDP then falls by 0.5% this year. That would automatically be labelled a recession. If, on the other hand, the long-term sustainable growth rate was 3.5% (as in America today, many economists say) and growth slows to 1.5%, then the country officially avoids recession. Yet the fall in GDP growth relative to trend is identical in both cases. Likewise, the consequent rise in unemployment will be broadly the same.
A more sensible definition of recession might therefore be when the growth rate falls significantly (perhaps by at least two percentage points) below its long-term potential, causing unemployment to rise. In practice, potential growth rates are devilishly hard to estimate—not least in America in recent years. A best guess is that the world's potential growth rate is 3.5-4%, so a slowdown to less than 2% growth ought to count as a recession.
It is not only the definition of a world recession that is controversial. The actual figures for global GDP growth should also carry a health warning. For instance, one investment bank, Morgan Stanley, predicts global growth of 2.4% for this year, down from 4.8% in 2000. J.P. Morgan, on the other hand, is gloomier, with growth forecast at just 1.6%. However, closer inspection reveals that the difference between the two forecasts is due largely to different methods used to add together individual countries' growth rates.
Morgan Stanley, like the IMF, uses weights based on countries'GDP measured at purchasing-power parity (PPP), which adjusts for differences in price levels between countries. J.P. Morgan uses weights based on GDP at market exchange rates. The PPP method gives far more weight to emerging economies, especially to China, and since these economies are growing faster than rich ones, the PPP-based figure for global growth comes out higher. Whichever measure you take, though, the world economy is dangerously close to recession.
The dark side of the boom
At the start of this year, only the American economy gave real cause for concern. How has the blight spread so quickly? One reason is that stockmarkets everywhere have collapsed, hurting business and consumer confidence. Another is that America has exported some of its slump in business investment to other countries. According to Salomon Smith Barney, over 40% of American investment equipment is imported, compared with 25% in 1992. American imports now amount to 6% of the rest of the world's GDP, double their share in 1990.
That might still sound modest, but the annual rate of growth in American imports has slowed from almost 20% in the second quarter of last year to minus 10% this year. That has taken a big slice out of global growth. American imports of information-technology equipment fell at an annual rate of almost 50% in the three months to May, compared with growth of over 20% late last year. This has hurt Asian producers especially. Singapore's industrial production has sunk by 16% over the past year.
Germany's greater dependence on exports of capital goods partly explains why it has been hit harder than other euro-area economies. However, the crude figures on trade caused many economists to understate the impact on European firms of America's slowdown. The sales of American-based affiliates of European multinationals are almost four times as big as American imports from Europe.
By sharing its economic pain with the rest of the world, America has been able to cushion the impact on jobs and consumer spending at home. However, exporting more of its slump than in the past also carries a risk. Those countries pushed into recession by weaker American demand will, in turn, buy less from both the United States and the rest of the world, magnifying the initial effect.