As finance ministers and central bank governors from the G-20 nations get ready to meet on June 4 and 5 at Busan in Korea to discuss a host of issues revolving around the global economy, it is time for another assessment of the global economic recovery.
A recent analysis in the Economists? Forum of FT by Eswar Prasad and Karim Foda concludes that while recovery may not be ?firmly entrenched?, the economic picture looks far better than it did a year ago. The two senior economists from the Brookings Institution gathered data from the G-20 economies and created the Brookings Institution-FT index for the world economy, which has been christened TIGER (Tracking Indexes for the Global Economic Recovery). This index combines Real Economy Indexes, Financial Indexes and Confidence Indexes to come to interesting conclusions that bring more hope and optimism for the global economy, than is perhaps warranted just as yet.
TIGER, or the composite index, includes indicators of real economic activity, as captured by GDP, industrial production, employment, imports and exports. It includes financial sector indicators such as national stock market indexes, stock market capitalisation, and in the case of emerging markets, their bond spreads relative to US treasuries. Finally, it also includes indicators of business and consumer confidence. Study of these indicators across advanced and emerging economies by the authors reveal five dominant trends.
First, while growth rates of many of these indicators plunged into negative territory during 2008, they turned the corner by mid-2009 and strengthened gradually thereafter.
Second, growth rates of indexes have varied widely, with those for industrial production and trade volumes recovering more significantly than for GDP and employment. Employment growth in advanced economies has been very weak , but ?is now showing some signs of life. So the recovery is ever so slowly becoming more broad-based.?
Third, the world financial markets have outperformed the pace of key macro-economic variables. The problems in the euro zone have, however, rattled these markets in the last two months, which also places a question mark on the real status of recovery across global economies.
The fourth trend is with respect to confidence measures, which have been rising gradually in both advanced and emerging market economies, even while consumer confidence in advanced economies has ?been stuck in a rut in recent months.?
A final trend they observe is with respect to the recovery in emerging markets, notably China and India, being far stronger than in the advanced economies. Yet they conclude that the world economy is ?not yet out of the woods, and all manner of risks could forestall the recovery.?
Taking stock of these not insignificant trends, can one agree with the conclusions arrived at, namely, that ?the world economy is recovering, and despite all the portents of doom, the world economy has been quietly mending itself?? The answer, unfortunately, is not quite affirmative. The authors of the study have overlooked some significant features of the healing process, which are essential to factor in before arriving at summary conclusions. This is essential, so as to foreclose the possibility of a pre-emption of efforts of the G-20 leaders, when they meet in Busan in early June, and in Toronto later in the month.
What exactly are these errors of omission? First, TIGER needs to be sensitive to volatility across markets, be it commodity or stock markets. Stability is a crucial feature, which is more sensitive to the status of recovery than rates of growth alone. So this needs to be factored in if the resultant index is to provide a reasonable measure of world economic recovery.
Second, for TIGER to be effective, it needs to include in its ambit of study the size and nature of policy interventions concomitantly adopted, if it is to provide an accurate picture of global health. If high rates are achieved on the strength of outside intervention, the implications are different from when the impetus for growth is internal. Third, the results, in order to be meaningful, need mapping for at least a continuum of half a year, or better still, a year, before arriving at hasty conclusions, and in the process allowing policymakers to develop a false sense of complacency. Last, perhaps it is worthwhile to start with defining a sustainable recovery before going on to create a TIGER-like index.
The writer is a civil servant. Views are personal
