WORLD OUTLOOK

Events in the Gulf have finally brought an end to the world economic boom of the last eight years. The oil price shock itself is only partly responsible for the downturn. The previous tightening of monetary policy in the face of inflationary pressures and the end of a rapid period of credit and asset price expansion had severely weakened the ability of some economies to respond to the shock. This is reflected in the diversity of response, most obviously in the United States where Fed fine tuning and the credit crunch have already weakened the economy. The rise in oil prices has led to a sudden collapse in consumer confidence and a swift cutback in output. Although we do not expect the recession to be deep, the financial problems will delay recovery. The Japanese economy was already in financial difficulties before the shock, although the real economy was stronger and here we expect a sharp deceleration from almost 6 per cent growth last year to around 3.5 per cent. In contrast the German economy, partly shielded by the substantial appreciation of the DM over the last year, has been affected less by the oil price shock and we expect the consumer and investment boom to continue this year as the economies merge. This provides a welcome boost to other European economies.     

The London Business School with Gower Publishing: Forecast Release: THE TIMING OF RECOVERY

In his Budget speech the Chancellor argued that "there are good reasons to expect that the recovery will begin around the middle of this year, although initially it may be slow. As we found ten years ago, confidence revives as inflation comes down… Just as falling consumer spending contributed to the onset of recession, so returning consumer confidence is likely to lead the recovery." Since then Mr. Lamont has detected 'faint stirrings' of a recovery in activity, while the Prime Minister is confident of a return to growth, arguing this month that "there are far too many indications for anyone to doubt that in the second half of this year there will be a great improvement and we will be coining out of recession." For all the official confidence that their relatively modest prognosis, which we shared in our June forecast, is proving correct, there are many who remain doubtful. The survey data, while improving, do not yet convincingly point to an upturn and there is a fear that while lower inflation and easier monetary policy would on their own produce higher spending, this effect could be outweighed by consumer caution in the face of rising unemployment. This Forecast Release examines these issues. It focuses particularly on the link between lower interest rates, falling inflation, rising unemployment and the savings ratio and finds that, on the basis of the experience in the recessions of 1975 and 1980 and the boom of 1988, it would be surprising if the savings ratio were not to head lower in the second half of the year. The latest figures on retail sales, which rose more than 1 per cent in June, suggest that this may already be happening, though this will only be confirmed by data showing a greater willingness on the part of consumers to step up their borrowing once again.     

The Global Extent of the Great Moderation*

In 2008 the US financial crisis spilled over into a number of other economies causing declines in GDP across the world. Yet the decades preceding the current downturn had been a period of unprecedented stability for the US economy. This article examines annual data for 98 countries over the period 1961–2007 and finds that lower GDP growth volatility in the period preceding the current crisis was not confined to the US. It is detected in a number of developed and developing countries, suggesting that a reduction in volatility in this period was a more general phenomenon.     

The London Business School with Gower Publishing

The New Year has started with a burst of enthusiasm in UK asset markets. The stock market has reached an all-time high and the pound has recovered from the sub-1.50 and DM2.40 lows that it hit in the aftermath of its exit from the ERM last September. There are external reasons for the buoyant start to 1993, namely the exposure of UK companies to the us economy where recovery seems assured, and the desire to park short-term funds outside the EMS where renewed turmoil greeted the start of the New Year. But over and above this, hopes have risen that the worst of the UK downturn may be over, that recession is at last ending and recovery beginning. It is this question that we examine here.
We have argued before that the recession will not be over in any meaningful sense until the level of output tops the pre-recession peak of the second quarter of 1990, output growth returns to its trend rate of 2-2.5per cent and unemployment starts falling, But in a more limited sense we can ask whether output has stopped falling and whether a recovery in output is under way. Specifically we may ask whether, when the CSO comes to date the trough of the recession, it will be put in 1992 or whether it is still ahead of us in 1993.
In answer to this last question, we find that the trough of the recession may have occurred as long ago as April 1992. If so, the initial recovery phase has been feeble to say the least - there is almost no hard data yet showing a recovery in output. What is evident - and it is on this that market enthusiasm is based - is that (consumer) demand is rising slowly. The hope is that the increase in demand will be sustained, and that a recovery in output will follow.     

Forecast Summary

The economy is in the throes of its biggest downturn in ten years. Output has been falling and unemployment rising for nearly a year and business confidence indicators suggest no early letup. In the last 12 months total output has fallen 2 per cent with manufacturing 5 per cent lower. This, we believe, is the trough of the recession and we expect signs of recovery to be evident in the late spring. Even so, output is likely to fall by nearly 1 per cent this year and unemployment should rise well above 2 million. The benefits of recession have been slow to appear, though the trade gap is narrowing sharply. The downward pressure on prices from falling demand is balanced by rising costs as industry struggles to pass on high unit labour and interest costs. Helped by some reduction in mortgage rates and a severe squeeze on profits, we expect retail price inflation to fall to Sper cent by the end of the year and to 3–4 per cent over the medium term.     

WORLD OUTLOOK

The slowdown in the world economy, which followed last year's oil price collapse and which awakened fears that the world was on the threshold of a new recession, is coming to an end. Output growth in the first half of the year was stronger than we had previously expected and a gentle acceleration is forecast over the next eighteen months. In contrast to this improvement on output, there has been little or no progress on the major problems of the world economy, including the USA's twin structural deficits, budget and trade, and the international debt crisis. Moreover, with the US facing elections in just over a year's time, no economic initiative is likely until 1989. Hence the prevailing view that the US and world economies will "muddle through" for another year. But in 1989 a new US administration is likely to face up to the trade and budget imbalances and many US forecasters believe that the required fiscal tightening will lead to recession. As we explain below, this is not our view and the forecast embodies steady 3 per cent growth in the world economy over the medium term. Inflation has now passed the low point brought about by the oil price collapse. On our forecast of output, inflation is expected to remain close to its present underlying rate of 4 per cent.     

Economic Viewpoint The Shape of the UK Recovery

Monthly economic data combined with the more optimistic tone of CBI and other surveys suggest that the recession may be drawing to a close. By the early summer it was becoming apparent that output was no longer falling; now it appears that the economy is in transition front the 'bumping along the bottom' phase, which lasted through the summer months, to the beginnings of a modest recovery in output and demand. The focus of interest is therefore switching away front the timing of recovery towards its shape and strength.
We have previously argued that the recovery would be led by consumer spending, that industry would not resume investment spending un ti1 demand elsewhere was picking up, and that although exports have held up remarkably well, taking some of the strain of the downturn in domestic demand, there was little prospect of a surge in world trade to provide the pre-conditions for an export-led recovery. What was and is needed is a recovery in consumer confidence, with a willingness to borrow at lower interest rates showing up in a reduction in the personal savings ratio.
But the recovery starts with the personal sector still having a large debt overhang from the 1988-9 boom, which will inevitably inhibit new borrowing. Meall while the credit crunch is restricting the ability of banks to lend. Together these imply only a limited response to the interest rate cuts of the last year and would, in the absence of the EMS link with high German interest rates, argue for further interest rate reductions. But high post-unification German rates put a floor under UK rates and will slow the recovery. The economy will do little more in 1992 than make up for the output losses of 1991 and our forecast (as in June) suggests that it will not be until 1993 that previous output peaks are passed and unemployment is stabilized.     

Hedging inflation with individual US stocks: A long-run portfolio analysis

This paper examines whether individual stocks can act as inflation hedgers. We focus on longer investment horizons and construct in- and out-of-sample portfolios based on the long-run relationship (cointegration) of stock prices with respect to consumer prices. Empirical evidence suggests that investors are better off by holding a portfolio of stocks with higher long-run betas as part of asset selection and allocation strategy. Stocks that outperform inflation tend to be drawn from the Energy and Industrial sectors. Finally, we observe that the companies average inflation hedging ability declined steadily over the past ten years, while the number of firms that hedge inflation has decreased considerably after the recent downturn of the US economy.     

POST-CRASH INDICATORS

The stock market crash has inevitably awakened fears that the world economy may be on the brink of recession. We examine the movement in output pre- crash and the evidence which is so fat available for the fourth quarter. The response of policy makers is also considered. We conclude that, ahead of the crash, output was rising strongly and that there are no signs yet of a slowdown. In the US consumer confidence has been dented, but elsewhere easier fiscal and monetary policy may fully compensate for the crash     

The London Business School With Gower Publishing: FIGHTING YESTERDAY'S BATTLES

With still no firm evidence at home of a recovery in non-oil GDP, the government's main worries centre on the path of output ahead of the General Election. In a forecast, which relies heavily on exports to stimulate demand in 1992, the Treasury cannot regard the rising probability of renewed recession in the US or the very sharp slowdown currently taking place in Europe as the post-unification German boom runs out of steam with equanimity. The fear mist remain in Conservative politicians' minds that there will be no meaningful recovery within an electorally significant timescale. We sketch out this background, but our focus here is not on the prospects for recovery; rather we ask whether the recession has achieved its objectives. The recession was, it should be remembered, the direct product of government policy - interest rates were raised to 15per cent ahead of ERM membership - aimed at reversing the excesses of the late 198Os'boom and in particular at bringing inflation quickly down to acceptable European levels and reducing the deficit on the current account, which at its peak in 1989 amounted to 4 per cent of GDP. Our answer is that, over the last year of recession, considerable progress has been made: the rate of inflation is now in line with that in Germany and the current account deficit has fallen to under 1 per cent of GDP. But, on the government's own forecasts contained in the Autumn Statement, there will be some slippage on both counts in 1992. It is this worrying feature that we consider here. Our overall conclusion is that the recession has not completely delivered its objectives and that, even as the politicians turn their attention to recovery, we still have to fight yesterday's battles.     

WORLD OUTLOOK

The world recovery, now 18 months old, suffered two major setbacks in May: heightened political tension in the Middle East and a crisis in financial markets following a rise in US interest rates. On the assumption that oil supplies are not disrupted, we forecast that industrial production in the OECD area will rise by 7per cent in 1984 compared with 1983 and that total GNP will be 4 per cent higher. The Fed3 decision to tighten monetary policy, and run the risks of a US banking crisis, underline its determination to prevent the re-emergence of high inflation in the US. Higher interest rates are expected to produce a pause in the US recovery later this year, but, by reining back the economy and dampening down inflationary expectations, they should avert both a return to high inflation and the need for a more pronounced US recession at a later date. Compared with the January forecast, therefore, in which we assumed that, for political and debt-crisis reasons, the US authorities would avoid a rise in interest rates, the present forecast embodies higher interest rates and an earlier pause in the American recovery but, in the medium term, lower inflation and steadier growth of output. For the European and Japanese economies, where policy has remained more restrictive throughout, we have not changed our view that inflation will continue either to remain low (West Germany, Japan) or to moderate (France, Italy), thereby underpinning a sustainable medium-term recovery.     

Forecasting Consumption: the Role of Consumer Confidence in Real Time with many Predictors

We study the role of consumer confidence in forecasting real personal consumption expenditure, and contribute to the extant literature in three substantive ways. First, we re‐examine existing empirical models of consumption and consumer confidence, not only at the quarterly frequency, but using monthly data as well. Second, we employ real‐time data in addition to commonly used revised vintages. Third, we investigate the role of consumer confidence in a rich information context. We produce forecasts of consumption expenditures with and without consumer confidence measures using a dynamic factor model and a large, real‐time, jagged‐edge dataset. In a robust way, we establish the important role of confidence surveys in improving the accuracy of consumption forecasts, manifesting primarily through the services component. During the recession of 2007–2009, sentiment is found to have a more pervasive effect on all components of aggregate consumption: durables, non‐durables and services. Copyright © 2015 John Wiley & Sons, Ltd.     

WORLD OUTLOOK

Over the last 12 months industrial production in the OECD area has risen by 8–9 per cent, only slightly less rapidly than in the first year of recovery from the OPEC 1 oil crisis. Much of the growth in output stems from a very rapid expansion in North America although, in the second half of 1983, output in Europe and Japan began to accelerate. We expect the recovery to be maintained during 1984 with some convergence of growth rates. For the year as a whole we are now forecasting 61/2 per cent growth of industrial production, 33/4 per cent for total GNP. By the end of 1983 the long-standing reduction in inflation had run its course and OECD consumer prices were about 5 per cent higher than a year earlier. Within the area some countries, such as France and Italy, were still reducing inflation, but this was offset by the US where inflation has been rising slowly since the summer. We expect these trends to continue in 1984, i.e. stable inflation in the OECD but accelerating prices in the US, producing in each case about 5 per cent inflation. In 1985 we are now forecasting a slowdown in the world economy. This is expected to be centred on the United States, where the problem of the Federal Budget remains to be tackled. By the time of the Presidential election the US economy will have registered two years of relatively rapid growth. This is likely to be producing upward pressure on prices and interest rates and, as a result, a pause in 1985 in the growth of output. In Europe and Japan, where output has grown more slowly, we expect the recovery to be sustained in the medium term.     

The US Recession

In the last five months US industrial production has fallen 71/2 per cent, while GNP fell by over 2 per cent in the second quarter. In April, when the latest figures were indicating that industrial production had fallen 1 per cent in February-March, President Carter admitted that the economy was "probably now in recession", with the qualification that it would be "mild and short". This was followed almost immediately by the news that the index of leading indicators had recorded its largest ever fall in April, and, from President Carter, the admission that recession had come to the US "quicker and steeper than we thought" and that the outlook looked "serious". Subsequently the fall in industrial production has gathered pace and in the last three months alone output has fallen by nearly 7 per cent. In the recession of the mid-19 70s industrial production fell by over 15 per cent in the space of six months, from September 1974 to March 1975. Over a rather longer period from the end of 1973 to March 1975 GNP registered a fall of over 5 per cent most of which was concentrated in the latter six months. In this Forecast Release we examine the cyclical behaviour of the US economy and, by comparing the recent experience with that of 1974-75, attempt to throw some light on the likely extent and depth of the current recession. As in our Forecast Release of May we remain of the opinion that the recession is unlikely to be either "mild"or "short"     

WORLD OUTLOOK

The rise in the oil price since the Iraqi invasion of Kuwait in early August does not radically alter prospects for the world economy; rather it exacerbates existing trends. The US economy was, in any case, heading towards recession and a sizeable overshoot of its budget deficit targets. Japan, especially, but also continental Europe had still not reached the peak of the economic cycle so that inflation and interest rates were still rising. While the higher oil price adds to costs and prices in all countries, the policy response is unlikely to be unborn. In the US the adverse effects on output are being emphasized while elsewhere the inflationary implications are to the fore. In Japan, where acute labour shortages are emerging, the monetary authorities have already raised interest rates and we expect a similar response from the Bunds bank In the US such a move is unlikely; indeed once an agreement on the budget deficit is obtained between President and Congress, we would effect the Federal Reserve to cut interest rates. Despite this view on policy, the forecast offers little prospect of the US avoiding a pronounced slowdown and takes a gloomy view on US growth in the medium term. In Japan and Germany on the other hand the short-term inflation outlook appears containable and growth prospects over the medium term robust. The central forecast is based on a $25 oil price; we explore in a simulation what might happen if the price rose to $45 a barrel for a limited period.     

Predicting a recovery date from the economic crisis of 2008

Predicting a recovery from a crisis is always difficult, but it is particularly so with the 2008 crisis in the United States. How could a small segment of the financial markets known as subprime credit bring down the world’s largest economy into the worst recession since WWII? The resulting conflicts in policy responses are so severe that the short-term objective (recovery) clashes with the longer-term and more structural goals (governance, regulations, technology). This and the enormous uncertainties caused by it add to the difficulties to predict the pace of recovery. While the economic turnaround depends on consumers’ decision to spend and business’ decision to invest and hire, in an uncertain situation such decisions can only be taken as a result of market players’ perceptions of opportunity that depend on their emotional state and confidence. When the latter produces spontaneous urge to action (‘animal spirits’), the recovery process accelerates. Thus, the appropriate model to predict recovery should be able to incorporate such perceptions factors. By identifying and prioritizing economic and policy factors, it is shown how such a model, the Analytic Network Process (ANP), can be used to make the prediction of the recovery time of the US economy. The forecast was made during Spring 2009 by the author working with participants in a seminar of “Economics of Financial Crisis” at Cornell University. We used an expert judgment approach within the framework of a decision theory model, based on the ANP structure that captures the interplay between financial market, housing sector, and market confidence, all of which are influenced by a range of policies. It is estimated that a real sustainable recovery will begin around late July or early August 2010. While a quicker recovery is possible given the enormous size of fiscal stimulus, monetary injection and unprecedented measures of qualitative easing, it is our conjecture that the temporary nature of all these measures will make such a quick turn-around unsustainable (a double-dip recession). When sensitivity analysis was performed, it was found that altering the priorities of the policies, and their interactions with the aggregate demand components, would not significantly change the estimated time to recovery. This stability of the prediction is due to the overriding importance of restoring confidence, making the other factors less important.     

Desperate entrepreneurs: no opportunities,no skills

Promoting entrepreneurship has become an important policy strategy in Europe in the hope to stimulate the crisis-shaken economy. In this paper, we caution against undue expectations. Using data from the Global Entrepreneurship Monitor for 17 European countries, we find that a considerable proportion of the new entrepreneurs have started a business despite a negative perception of business opportunities as well as lack of confidence in their own entrepreneurial skills. This proportion has increased during the economic crisis, especially in those countries which were particularly affected by economic downturn and rising unemployment. We extend existing entrepreneurship theories to account for this phenomenon, which we call “nons-entrepreneurship”. Testing the hypotheses derived from our model, we find that the primary motivation for these people to turn to entrepreneurship is the lack of other options to enter the labour market during the economic crisis. Still, this sort of “desperate” entrepreneurship does not equal necessity based entrepreneurship, warranting further research.     

The London Business School with Gower Publishing

Over the lastfive years events in the United States have been repeated throughout the OECD area, with a lag of 6–12 months. A repeat of this pattern in I982 would mean that the recovery in Europe and Japan, which has been progressing slowly since the middle of last year. would not last into 1983. The present forecast excludes this possibility. The argument, which we have put previously, is that the US recovety of 1980 was premature and that the current recession Jollows a renewed attempt by US policy-makers to reduce inflation. There are already signs that they will be succes & Consequently we do not expect the US recession to be prolonged In the second haIfof the year we expect an expansion of output to be in progress, both in the US and elsewhere; in the next few months, however, world activity is likely to remain subdued.     

The London Business School with Gower WORLD OUTLOOK

Although there are indications that the world economy is beginning to emerge from recession, the early stages of recovery are turning out to be extremely weak and industry worldwide has still not recorded any significant advance. Consequently business planners are now having to take account of the possibility that there will be no recovery during 1982 or even that the world will enter a prolonged downturn. We discuss these scenarios here and indicate why we consider them unlikely; our central forecast remains that the world economy will enter a recovery phase towards the end of 1982 and grow strongly in 1983-84.     

Mexico under NAFTA: a critical assessment

This paper assesses the evolution and performance of several key economic and social variables in Mexico following the passage of NAFTA. The evidence shows that under NAFTA Mexican trade and foreign direct investment inflows have risen at rapid rates, particularly in the export-oriented assembly-line sector. However, the evidence also suggests that it is hard to disentangle the effects of NAFTA from the other non-NAFTA factors such as demand in the U.S. in explaining the dynamism of the Mexican export sector (and economy). This has been attested by how the Mexican economy has been dragged into a severe recession over the past two years as a result of the relatively mild downturn in the U.S. business cycle.Insofar as employment growth, real wages in manufacturing, and productivity performance is concerned, the evidence presented indicates that the record has been lackluster at best and disastrous at worst. Manufacturing employment fell dramatically after the peso crisis, and remains stagnant. Real wages have plunged since the peso crisis and have yet to recover levels attained in the mid-1980s. In terms of productivity performance, no strong conclusions can be reached given the conflicting estimates in the extant literature. At best, the data show that productivity rose at healthy rates in the tradeable sector, but stagnated in the non-tradeable sector.Finally, the paper presents evidence which shows that both the functional and size distribution of income have become more skewed during the period of trade and investment liberalization (JEL 040,054).