2010 Outlook

by Jérémie Cohen-Setton on 18th January 2010

What’s at stake: The latest jobs numbers, along with a large drop in consumer credit and signs of a renewed weakness in housing, are leading some to again ponder the possibility of a double-dip recession. At the American Economic Association’s annual conference, held in Atlanta, some of the top economists were in attendance and gave their predictions for the years ahead. Others discussed the shape of things to come for the teen decade in op-eds and blog entries.

Paul Krugman joined Harvard’s Martin Feldstein and Columbia’s Joseph Stiglitz, in sounding an alarm for the world’s largest economy during the annual meeting of the American Economic Association. Feldstein called the fading stimulus “a serious cloud” and Stiglitz said growth won’t be “robust” soon. Krugman’s forecast is more pessimistic than the median estimate of 58 economists surveyed by Bloomberg News in early December, which called for a 2.6 percent expansion this year following a 2.5 percent contraction in 2009. The double dip issue is present everywhere in the advanced world as we all have stimulus programs that kind of fade out, Krugman further wrote in his NYT column.

Calculated Risk reports that the December FOMC minutes suggest a slow economic recovery. Participants expected the economic recovery to continue, but, consistent with experience following previous financial crises, most anticipated that the pickup in output and employment growth would be rather slow relative to past recoveries from deep recessions.

John Lipsky writes that the year 2010 has opened amid generalized – but tempered – optimism about the global economic and financial outlook. Looking forward, the new decade is ushering in a series of at least five key challenges. The first is to secure the recovery, by ensuring that policies among the key economies remain appropriately supportive of the expansion, as well as globally consistent. A second challenge is to protect the poorest and most vulnerable from the impact of the downturn and to restore growth in low income countries. The third challenge is the reform of the financial sector, with the triple goals of making the sector more effective, of reducing the risks of future instability, and to rethink how the potential costs of financial crises might be borne. The fourth challenge is that of restructuring and reforming the governance and mandate of the key international financial institutions. There is a fifth challenge, and it will be the source of intense debate in the coming quarters – perhaps years. The crisis has called into question not just institutions, but also the intellectual underpinnings for prevailing views regarding economic and financial policies.

Robert Shiller says that strategic default on mortgages will grow substantially over the next year, among prime borrowers, and become identified as a serious problem. The sense that ‘everyone is doing it’ is already growing, and will continue to grow, to the detriment of mortgage holders. It will grow because of a building backlash against the financial sector, growing populist rhetoric and a declining sense of community with the business world. Some people will take another look at their mortgage contract, and note that nowhere did they swear on the bible that they would repay.

Dan Gross writes that the economy will recover no matter what happens to the housing market. It may be difficult to imagine, but we’re going to have to have this recovery and expansion without housing. In fact, we already are… We’ve shown that we don’t need housing to produce growth. The U.S. economy has staged an extremely dramatic turnaround, from contracting at an annual rate of 6.4 percent to growing at a 2.2 percent rate in the third quarter. Macroeconomic Advisers says fourth-quarter growth is tracking at a 4.9 percent annual rate. If that proves true, the economy’s growth rate will have risen 11.3 percent in a nine-month period – an astonishing shift. And all this growth has occurred as house prices continued to fall and consumer lending declined.

Eric Chaney sees three reasons for optimism in 2010: the global inventory cycle will prove more powerful than generally assumed; the global effect of fiscal stimulus is most probably underestimated; and in the short term, the price of crude oil is likely to decline. The longer term assessment is more uncertain. To become sustainable, the global recovery will have to start walking on its own legs, as policy crutches are either removed (monetary policy) or crumble under their own weight (fiscal policies).

Carmen Reinhart and Kenneth Rogoff presented a new paper in which they argue that higher public debt may stunt economic growth in the coming years. Countries with a gross public debt exceeding about 90% of annual economic output tend to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth is about two percentage points lower than for countries with public debt of less than 30% of GDP. The relationship between government debt burdens and growth is even stronger for emerging-market economies.

Gary Becker, Steven Davis and Kevin Murphy write that policy uncertainty will continue to slow the recovery. The authors argue that a recession is a terrible time to make major changes in the economic rules of the game and see and the recent activism of policy authorities as the main reason for explaining the slow recovery. Faced with a highly uncertain policy environment (for microeconomic policies as well as macroeconomic ones), the prudent course is to set aside or delay costly commitments that are hard to reverse. The result is reluctance by banks to increase lending – despite their huge excess reserves – reluctance by businesses to undertake new capital expenditures or expand work forces, and decisions by households to postpone major purchases.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


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