Global Economic Growth: the Pause that Refreshes?

Any athlete knows there are times in a contest when you rest. A marathoner can’t sprint the last mile if she tries to sprint all the miles. The sprint takes it out of you. The world economy was on a sprint before the last crisis hit. The downturn didn’t hit all places at the same time – but a look at world growth in 2005 and 2006 looks like a global economic sprint. Some policymakers long for a return to those heady days. I try to explain below why a fast return may not be the best approach to sustainable gains and lower unemployment.

The average annual growth rate of the world's advanced economies (35 countries labeled so by the IMF) from 1995 to 2004 was a modest 2.8 percent. The median growth rate of the real GDP of these economies  was 3.9 percent in 2006. In 2006 the top 17 countries had real GDP growth rates ranging from 3.9 percent to 10.1 percent. IMF projections for 2014 have the top 17 countries growing anywhere from 1.6 percent to 5.5 percent. (The data and the list of countries can be found in table A2. Advanced Economies: Real GDP and Total Domestic Spending  http://www.imf.org/external/pubs/ft/weo/2013/01/pdf/tables.pdf )

Clearly 2006 was a very strong period of world economic growth. The strong growth was shared across most countries. The recession stopped all that with no change in world growth  in 2008 and a contraction of 3.5 percent in 2009. World growth returned to positive but averaged only 1.4 percent per year between 2011 and 2012.  We are clearly still far off the torrid growth pace of 2006. With respect to these 35 countries the great majority will be nowhere near their 2006 paces even by 2018. The IMF forecasts the following real GDP growth relative to the strong growth of 2005 and 2006:

•   4 countries will return to past high growth by or before 2014: US, Australia, Japan, Norway
•   6 countries will return to strong growth by 2018: Germany, France, Greece, Portugal, UK, Taiwan
•   25 countries will not return to strong growth rates by 2018.
•   Some 12 years beyond 2006, only 10 countries are predicted to return to strong economic growth. Some of the 25 countries on the list that will not repeat past strong growth include Italy, the Netherlands, Canada, South Korea, Iceland, Estonia, Singapore, Czech Republic, and Hong Kong.

For people in many of these countries, this slow growth is not desirable. Unemployment is too high and many business firms are having trouble staying afloat. Interest rates are low preventing savers from reaching their investment goals. Houses remain empty or unsold and excess capacity deteriorates. Countries have large debts that limit their use of traditional fiscal policies. The negatives are stark and frustrating.

But there may be a silver lining. Like a pause in the runner’s pace, this growth respite is not all bad. To understand this we look back at the 2005/2006 period’s strong growth. With so many countries growing so quickly at the same time, we placed impossible demands on world commodities markets. To produce so much economic output for the world takes inputs. Output requires energy, steel, aluminum, copper, rubber, and many more commodities. Demand for food commodities also spiked. Bringing all this together we saw commodities prices ebb by 2002 and then increase dramatically thereafter until falling sharply in the middle of the global recession.

The prices of many commodities doubled (or more than doubled) in the run-up after 2002. While the global recession caused a temporary hiatus in inflation the subsequent economic recovery witnessed a return to strong commodity price growth. Recent pessimism about economic growth in Europe and China has taken some steam out of commodities but with the US, China, and many other emerging countries showing resilience, commodity demand and commodity prices are ready to resume a rapid upward clip. The only real thing that will forestall them is a more gradual return to stronger growth among the leading countries.

A quicker turnaround in world growth sounds good on the surface but if it brings with it another bout of extreme commodity price inflation, it is doubtful that firms will be able sustain a stronger pace of output in the face of rapidly increasing business costs. We see now how uncertainty about rising medical costs and taxes puts a lid on hiring – another bout of rising commodity prices would just add to that.

It seems perverse but right now good economic news is not necessarily unqualified good news. We want to finish the race in first place. Running too hard right now is not the way to do it. It might be frustrating watching some runners catch up, but we need to have some patience and some trust that the tortoise might again beat that pesky hare.