It is very easy to get depressed just at present about the global economic situation, especially if you listen to the news too much. In my economics posts I have tried to educate myself and, hopefully, others about some of the economic parameters involved without getting too caught up in the short term detail.
In this post I want to continue the discussion by focusing on a few macro numbers.
The table below sets out 2007 GDP for the top twenty global economies. Between them, they amount to a bit over 81 per cent of global GDP.
First the bad news.
If you look at the relative size of the economies that are either in or likely to enter recession, you can see why the world has an economic problem. In simple back of envelope terms, with countries controlling over 55 per cent of the global economy entering recession, the remaining 45 per cent must inevitably be affected.
The numbers also show why a degree of caution needs to be exercised in talking about the role of countries such as China or India. The US economy is presently a bit over four time the size of China's, so every one per cent fall in US GDP requires a four per cent increase in China's GDP to maintain the economic status quo.
The figures also indicate the size of the tectonic shift now underway in the global economy.
At present, India and China between them are a bit under one third the size of the US economy. If, as seems possible, the US records average zero growth over the next three years while India and China average 8 per cent over the same period, then (assuming my rough maths is correct), the combined India/China GDP will rise to around 41 per cent of the US total in just three years.
Table: World GDP 2007
Source: World Bank
Now for the good news, the reason why I remain optimistic, especially so far as Australia is concerned.
Major developed countries are going to have a nasty downturn whether we like it or not. This is already flowing onto other countries including China where unemployment appears to have risen sharply as a consequence of the downturn in manufactured exports.
In some ways the global financial system is awash with liquidity. However, and putting the financial crisis itself aside for the present, this will not translate into extra activity because people (consumers and business) are reluctant to borrow unless really forced to and then banks are reluctant to lend.
Most governments are putting old fashioned pump priming measures in place intended to stimulate consumption and investment. These will take time to come into effect. Further, the initial effects will be muted because some of the initial spend is likely to flow into savings and debt reduction. People just don't want to spend when things are so uncertain.
To my mind, the big kicker will come as increased government investment spending kicks in. This will vary from country to country, but in all cases will take time. With exceptions such as China which already has projects in the pipeline, governments will have to create project pipelines. From experience, it is likely to be eighteen months before spend accelerates in most countries.
Note that I have said nothing about confidence effects. My personal view is that there may well be more shocks and that, in any event, pessimism is likely to remain dominant until things have clearly started to improve.
Pulling all this together, my best guess is that we are going to see a deepening recession in most major industrial countries over the next twelve months. I do not see how this can be avoided, although the effects are going to vary from country to country.
Beyond this point, I would expect to see progressive strengthening in global economic activity as further investment spend kicks in. This is based just on mechanical economics 101 style analysis.
I really can't see in all this just how a depression might occur in global terms, barring some total catastrophic collapse. My bigger worry is the likelihood that the combined total of Government responses will over-shoot, creating a new set of problems on the other side.
Finishing with a note on Australia.
It would be a brave person who would say categorically that Australia can avoid recession. However, whichever way I look at the numbers, I think that we can say that Australia is better positioned than most to avoid a serious downturn .
We are also better positioned than most to benefit from increased investment spend since we are a key supplier of the commodity products that will be required as inputs into new infrastructure.
To the degree my overall analysis is right, then we are likely to see strengthening export demand twelve to eighteen months out.