President Barack Obama may be right in saying that there are "glimmers" of hope in the economy, but the International Monetary Fund says that overall, economic predictions continue to be glum—both in terms of how much longer the global recession is likely to last and how it will compare to past downturns.
"There are signs that things are turning around, but I'm worried that the message is that things are fine," the IMF's chief economist, Olivier Blanchard, said at the Carnegie Endowment for International Peace today. "The need for strong policies is still acute."
The global economy should emerge from recession by the end of 2009 or the beginning of 2010, Blanchard predicted. But recovery will be slow, with growth continuing to be less than the rate considered normal for years. As long as that's the case, meanwhile, high levels of unemployment will persist. "We can expect unemployment to crest at more than 10 percent in a fairly large number of countries," Blanchard said. Unemployment rates won't start turning around until the end of 2010, and employment levels very likely will not return to normal rates until 2012 or 2013, he added.
Given the current recession's potent combination of being a financial crisis and a "global synchronization" of economic downturns, those timelines aren't entirely surprising. Of the 122 recessions sustained by 21 advanced economies after 1960, only six also had those two features, said Marco Terrones, deputy division chief in the IMF's research department. Whereas an average recession lasts less than one year and recovery takes six quarters before the economy reaches its previous peak, this kind of recession lasts an average of nearly two years and has a recovery time of 3.5 years.
Those characteristics make strong policymaking even more important. Terrones pointed out that when a recession involves a financial crisis, the government's use of fiscal stimulus, for example, makes it much more likely that the country will emerge from recession faster. In fact, if a government does not markedly expand spending, IMF data show that its probability of continuing to be in a recession after five quarters is nearly twice as high as if it does institute a stimulus. But those positive effects decrease—and even become liabilities—if the stimulus inflates public debt to a degree that's too large to be sustainable, according to the IMF. The report issued this week says that the impact becomes negative when debt levels go beyond about 60 percent of gross domestic product—about the level that the United States could see by 2010.
Not only is the global picture grim, but it's far more so than one the IMF painted just three months ago. Back then, it projected that the world economy would actually grow by 0.5 percent in 2009. It reported last week that, instead, the economy will probably shrink by 1.3 percent, making this the deepest recession since World War II. As more data come in and the recession continues, even those estimates could turn out to be optimistic.