It’s ALL About Doom and Gloom
One of the silliest leads to an economic story I have read in a long time is on the front page of today’s Globe under this headline:
“It’s Not all Doom and Gloom: GDP’s Drop Suggests Recession Will be Short.”
The huge drop in output last quarter is perversely seen by the writer and some supporting bank economists as good news,Â since a faster and deeper descent into recession thanÂ the norm apparently setsÂ theÂ stage for a quicker jump out of a downturn.
I see no logic to this. If we were on the brink of a serious and long downturn, why would it not start with a terrible quarter?
One could argue that previous recessions wereÂ imposed by monetary policy, so very bad news initially would prompt a quicker easing up on the deflationary brake than woudl otherwise be the case.Â But this is not a case of a policy induced recession. Instead, the question is whether easier monetary policy is pushing on a deflationaryÂ string.
The story cites the Bank of Canada January forecast as a basis for optimism. Curious, then, that the Bank of Canada today revised down its outlook after looking at the dismal last quarter numbers, commenting as follows:
“National accounts data for the fourth quarter of 2008 and other indicators of aggregate demand point to a sharper decline in Canadian economic activity and a larger output gap through the first half of 2009 than projected in January. Potential delays in stabilizing the global financial system, along with larger-than-anticipated confidence and wealth effects on domestic demand, could mean that the output gap will not begin to close until early 2010.”
TheÂ relatively rosy scenario of aÂ turnaround in 2010 itself assumes that the financial system stabilizes (little sign of that in the US yet) and that the US and Canadian stimulus packages are big enough to offsetÂ sharp risesÂ in the savings rate,Â continuing declines in exports, and the effects of the unwinding of the US housing bubble. I don’t think so – and I expect that the next IMF forecast will project an actual contraction of global output in 2009.
If I was theÂ Minister of Finance or the Governor of the Bank of Canada,Â I would not be very inclined to take the gloomiest possible view of our prospects.Â Lack of confidence is indeed self-reinforcing to a sginificant degree.
But there is also little point in bank economists and the media peddling facile stories of a qucik turnaround, which won’t happen unless and until we get much more radical actions by the G-20 and others.
On which I’ll blog at greater length later.