Gloom and Doom, the IMF and the G20

I happened to listen to the end of week media pundits on CBC Newsworld and CBC Radio late Friday afternoon. Most – especially Don Martin and Joan Bryden on Newsworld – seemed perplexed as to why former Bank of Canada Governor David Dodge might have chosen to be distinctly more gloomy abour our economic prospects than Steven Harper or Mark Carney, as reported in the Globe earlier this week. What are we supposed to do, Martin asked plaintively, store up canned goods, retreat to the basement, and go into a deep funk? What’s the point of all of the pessimism?

I take the point that there is no point in the great and the good unnecessarily eroding fragile confidence among the unwashed masses. But – and I’m guessing here – Dodge was not grand-standing but spoke out of frustration. He probably thought, quite reasonably, that good policy depends upon an accurate assessment of the predicament in which we are in, and that being Pollyannish is to waste valuable time and make a bad situation much worse. His main point – with which I agree – seems to be that if we are in a long and deep recession, we might as well plan medium term public investments which have a long term payoff and not just the ready to go, shovel ready stuff. He might – but did not – add that we could do, not just with better targeted actions, but with much more fiscal and monetary stimulus.

All of which leads me to discussion of what I find to be a stunner of a report on Global and Economic Policies and Prospects prepared by the IMF staff for the March 13-14 meetings of the G20 Finance Ministers and Central Bank Governors in London, setting the stage for the April 2 G20 summit.

http://www.imf.org/external/np/g20/pdf/031909a.pdf

The urgent tone of this report sets the stage for some some key recommendations – the G20 leaders should add significantly to the fiscal stimulus now in place, intervene far more agressively to shore up the banks, and massively increase assistance to emerging economies which are about to get side-siped extremely badly.

The real stunner for me – this is on p.8 of the report – is this :

“Advanced economies will suffer deep recessions in 2009. G7 economies are expected to experience the sharpest contraction for these countries as a group in the post war period by a significant margin. ” (So much for all those nice charts in the papers purporting to show that earlier recessions were just as bad.) ” With negative momentum, and the limited effects of policy actions to lift uncertainty or address financial strains to date, the adverse macro-financial loops have intensified, and prospects for recovery BEFORE MID 2010 ARE RECEDING … IN THE UNITED STATES, THE CONTRACTION IN ACTIVITY IN 2009 IS EXPECTED TO PUSH UP THE OUTPUT GAP TO LEVELS NOT SEEN SINCE THE EARLY 1980S. ASSUMING THAT FINANCIAL MARKET CONDITIONS IMPROVE RELATIVELY RAPIDLY IN THE SECOND HALF OF 2009, BASED ON THE IMPLEMENTATION OF A DETAILED AND CONVINCING PLAN FOR REHABILITATING THE FINANCIAL SECTOR, AS WELL AS CONTINUED POLICY SUPPORT TO SUPPORT DOMESTIC DEMAND, GROWTH IS EXPECTED TO TURN POSITIVE IN THE COURSE OF THE THIRD QUARTER OF 2010.”

That does not seem to be a typo. It says no US recoveryuntil the end of 2010, assuming they fix the banking system and inject further stimulus. And David Dodge is supposed to be gloomy!

The report repays close reading. It details just how inadequate stimulus packages announced to date have been – including Canada’s – nicely underlining my long-time observation that IMF staff work is often hugely at odds with IMF press releases, such as that put out a few days ago praising the Canadian stimulus package.

I’ve pasted in below most of the Executive Summary from the report:

“Global economic activity is falling—with advanced economies registering their sharpest declines in the post-war era—notwithstanding forceful policy efforts.

According to the latest IMF forecast, global activity is expected to decline by around ½ to 1 percent in 2009 on an annual average basis, before recovering gradually in the course of 2010.

Turning around global growth will depend critically on more concerted policy actions to stabilize financial conditions as well as sustained strong policy support to bolster demand.

• Restoring confidence is key to resolving the crisis, and this calls for tackling head-on problems in the financial sector. Policymakers must resolve urgently balance sheet uncertainty by dealing aggressively with distressed assets and recapitalizing viable institutions.
• Since financial market strains are global, greater international policy cooperation is crucial for restoring market trust. Monetary policy should be eased further by reducing policy rates where possible, and supporting credit creation more directly.

Delays in implementing comprehensive policies to stabilize financial conditions would result in a further intensification of the negative feedback loops between the real economy and the financial system, leading to an even deeper and prolonged recession.