The Recession that Almost Was, A Commentary by Kenneth Rogoff, Economic Counsellor and Director, Research Department, IMF

April 5, 2002

A Commentary by Kenneth Rogoff
Economic Counsellor and Director
Research Department
International Monetary Fund
Financial Times
April 5, 2002

Amid increasing signs of recovery, there seems to be a growing denial that the global economy was ever in any real danger.

Many private forecasters have stopped asking when the US economy is going to pick up and started asking when it is going to slow down. A popular refrain is that "it's the recession that wasn't". Europeans congratulate themselves that the eurozone only barely experienced negative growth in one quarter. Meanwhile, some in Japan still seem to believe that their country's third recession in a decade is just a passing phase that can be forgotten as soon as US-led export growth picks up.

The reality is that the sharp downturn of the past year was almost a global recession. A sober assessment of future policies and prospects has to acknowledge the problems and vulnerabilities that remain.

How close a call was it? In preparing the forthcoming April 2002 World Economic Outlook, we went through an exercise first of figuring out just what a global recession is (there is no commonly accepted definition) and then trying to decide whether we had just lived through one.

We concluded that the ship had stayed afloat - but only just. It is true that global per capita output growth was 1.2 per cent in 2001. That is very different from the zero or negative growth experienced in each of the three previous global recessions of the past 30 years.

But world trade growth slowed almost to zero in 2001 from 12 per cent in 2000, a considerably sharper fall than in 1991, which did register as a global recession. Global industrial production fell for more than a year. In addition, quarterly data for gross domestic product registered widespread declines in activity, including in the US, Japan, the eurozone and much of the rest of the world outside India and China. Many people are still out of work. Do not try to convince them it was not a full-blown recession: it was not - but it was a close thing.

Things could have been a lot worse. Significant financial vulnerabilities - the high level of consumer and corporate debt in the US, for example - could have locked the economy into a more prolonged downturn had the recovery taken longer to emerge.

When financial and banking problems take root and where society cannot deliver a quick solution, normal recessions can turn into really protracted downturns. This is certainly a factor in the serial recessions that Japan has experienced over the past decade.

How is it that the US and Europe seem to have escaped this time? Credit should be given where it is due. There is no doubt that timely and aggressive monetary easing in the US and, to a lesser extent, in Europe played a role.

As for fiscal policy, Europe showed that it has some flexibility interpreting the straitjacket of its euro-driven deficit constraints - and the US was just plain lucky on the timing of the administration's first tax cut. Normally, attempts at counter-cyclical fiscal policy come in too late and prove to be pro-cyclical; let us just keep our foot off the gas pedal for a while, even if it is an election year.

A big piece of luck, so far, is that September 11 and the ensuing anthrax attacks proved to be one-off events. Economies can still grow under sustained security duress - witness South Korea and Israel - but hard-earned success to date on the anti-terrorism front has been a huge boon.

Last, we may have benefited simply from the fact that recessions have tended to become milder over time; this fact is documented in the forthcoming World Economic Outlook that looks at 93 episodes of recessions in industrialised countries over the past 30 years.

Global recessions seem to occur over a cycle lasting between eight and 10 years. With some luck, this past downturn will fill the quota for the decade, even if it did not qualify as an outright global recession. But recessions are a fact of life in the global economy - there is no magic formula for avoiding them. The boom-bust investment cycle in the technology sector was typical of the fits and starts one sees accompanying big new inventions.

This narrow escape should heighten policymakers' awareness that, in good times, it is vital to rebuild the global economy's ability to again withstand such punishment in the future. Inter national-Monetary-Fund advice to its leading member countries in recent years has been driven by this goal. Containing the US current account, restructuring the Japanese financial and corporate system, reforming Europe's labour and product markets-all are crucial.

Not all of these problems are strictly national; structural policies to facilitate stronger growth in the rest of the world would be the best way to alleviate the chronic US current account deficit.

Still, the principal lesson of this downturn is that individul economies that remain inflexible and fail to correct imbalances during growth years are courting serious trouble when the next recession strikes.


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