Global Recession: The Second Great Depression?

July 7, 2009

Jed Brewer, economist and senior vice president of Finance & Resource Management Consultants, compares the global recession to the Great Depression 80 years ago but looks for positive economic indicators.

Jed Brewer: positive outlook

It is now the middle of 2009 and I am continually looking for credible data to support any type of story the global economy is showing signs of recovery or that a recovery may only be a couple months away. I have not been too optimistic about finding such data, and unfortunately at the present, the data do not exist.

Economists Barry Eichengreen (University of California – Berkeley) and Kevin O’Rourke (Trinity College Dublin) have presented perhaps the most compelling evidence that our current experience is far from normal. The two are writing an academic article titled “The Tale of Two Depressions” and have published their initial findings and subsequent updates at voxeu.org a research-based policy outlet set up by the Centre for Economic Policy Research.

The chart below examines world industrial output since the beginning of the global recession and compares it to the Great Depression. The authors point out we are currently tracking quite closely with the trend of an event we do not want to repeat.

Source: Eichengreen and O’Rourke (2009) and the International Monetary Fund

World trade continues to be a significant concern. Year-over-year world trade is down 30% for the 15 major exporting countries, which includes countries such as Germany, France, Britain, China, Japan, the US, Canada, Mexico, and Australia, among others. The World Bank estimates total global trade will decline around 6% in 2009. This would be the largest year-over-year decline since the Great Depression. The Bank recently revised downward its estimate of global economic growth in 2009 from negative 1.7% to negative 2.9%. Indeed, we are in the middle of a relatively rare secular event that will change the nature of the global economy for years to come.

While the comparison with the Great Depression is appropriate in many ways, the good news is those in the developed world are starting from a much higher level than 80 years ago. In the US real incomes are over five times what they were during the Great Depression. Real incomes are even higher comparatively in many other countries. Social safety nets are also much wider than historical standards. Often I feel too much likening of our plight to times prior does a disservice to the men and women who suffered through indescribably difficult times before and to those today residing in more impoverished countries. Robert Zoellick, President of the World Bank, at a recent talk aptly provided the perspective: “In London, Washington, and Paris people talk of bonuses or no bonuses. In parts of Africa, South Asia, and Latin America, the struggle is for food or no food.”

The UK and US are showing the most promise of bottoming in the second half of 2009. They have buoyed their economies with relatively swift monetary action and large amounts of fiscal deficit spending. As the respective fiscal stimuli work their way through each economy it should help offset declines occurring in the private-sector. Both the UK and US, though, currently have total government (public) debt to GDP ratios of around 50%. The new fiscal deficit spending will only cause marked increases in these ratios for both countries. The US government’s public debt portion may reach 100% of GDP in five years’ time. These fiscal actions likely will smooth the countries’ short-run economic transitions but the debt’s requisite repayment will limit potential future economic growth. Recovery will be modest at best, with the distinct possibility of further contraction in 2010, after portions of the fiscal stimulus work through the economy.

I am a positive person by nature and do not necessarily like reflecting on the current times. But I do believe we need to confront the facts head on. The global economy is weak, but it will find a bottom.

At times, I gaze out and wonder what the world will look like in the next five to 10 years and how it will be different. Will the world become more unified or more fragmented through this crisis? Will countries rise up and rival the US as the world’s economic leader? How will the global regulatory environment be different? Which industries will survive? Which new industries and products will sprout up? And how will this industry adapt to the changing market environment and behavior of consumers? Many things about the future of the world are unclear but one thing is not: the world will be different.

Dr. Jedidiah Brewer is vice president of FRMC, Inc.