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No deep recession in the US, going by consensus forecasts

WHEN the respected Business Times of Singapore takes a stick to the World Bank’s humble East Asia and Pacific Update (‘World Bank’s analysis wide of the mark’, BT, Nov 20) , I sit up and take notice. What a pity, then, that your editorial, while high on sound and fury, adds little worth to either the facts or valid arguments about the outlook for East Asia. The Business Times seems quite upset that we are projecting a rise in East Asian growth to 8.4 per cent this year. Is your paper really unaware that most of the larger economies have already released GDP growth numbers through the third quarter of 2007 and that the outcome for the year is therefore already pretty much ‘in the bag’.

China grew 11.5 per cent on average in the first three quarters and growth has also accelerated over the course of the year in other large economies like Korea and Indonesia. The fact is that East Asia will have a hard time not growing more than 8 per cent this year.

Turning to next year, we note that the risk of recession in the United States has clearly increased but that the bulk of reputable economic forecasters still forecast an extended period of weak growth in the US and in other major developed economies in 2008 rather than an outright recession. We tend to stick fairly closely to consensus or mainstream forecasts for the developed world and are unable to assume ‘deep recession’ quite as airily as The Business Times. If that, in fact, is how conditions in the developed world turn out next year, then we argue that East Asia could also well be able to maintain its solid performance of recent times. Just look at what has happened in 2007; US GDP and import growth have already slowed sharply and, as would be expected, East Asian export growth has also slowed. But, despite slower exports, East Asian GDP growth has actually accelerated in 2007, because domestic demand growth in the region has picked up, a development related to quite favourable domestic macroeconomic, financial and corporate sector conditions in many countries. This is another among the set of important recent developments that seems to have escaped your newspaper’s attention.

What if the US does go into recession? We have taken the laborious route of looking at some of the historical facts about how East Asia has responded to past recessions, as well as some formal econometric studies of the issue. These suggest that the impact varies a lot across countries and also at different times, depending on what other factors are in play.

The downturn of 2001 was particularly severe because it was combined with a huge recession in global high-tech demand at a time when domestic demand in many East Asian economies was still very weak, in the aftermath of the financial crises. Neither of those conditions applies today. Of course, it is possible that some other combination of factors could cause a more severe downturn in East Asia and so the evolving economic situation in the region has to be closely monitored. But to claim that a recession is inevitable merely because of ‘increased economic integration’ and that past trends should be ignored simply because ‘the world has changed’ – these are surpassingly crude and simplistic assertions.

Milan Brahmbhatt

Lead Author

World Bank East Asia and Pacific Update

The World Bank

Washington, DC

BT’s editor replies: The main focus of our editorial was the World Bank’s projections for 2008, not 2007, which was only mentioned in passing. For next year, we had flagged a ‘possible deep recession’ in the US.

We do not believe we are in disreputable company here. Other forecasters who have indicated this same possibility include Goldman Sachs, which has pointed to the risk of a ‘substantial recession’, Prof Joseph Stiglitz (a Nobel laureate and former World Bank chief economist) who said that the US faces a ‘very major slowdown’ and Prof Nouriel Roubini of the Stern School of Business of NYU, widely acknowledged to have been one of the earliest to anticipate the US housing bust, who has, in fact, predicted a hard landing and an outright recession for the US economy – although we have not taken that position.

We also noted that China’s own government has a decidedly less upbeat (and more realistic) view of its country’s future growth prospects than the World Bank’s East Asia and Pacific update.

We stand by our editorial as constituting fair comment.

 

Source: Business Times 22 Nov 07

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