Get ahead of the curve. That is supposed to be the mantra of finance ministers and central bankers. Or: don’t wait to act until credit is crunched, banks are bankrupt and recession has momentum. But, right now, the curve is comfortably in the lead.
The new week has brought a raft of new depressing financial data. Japanese gross domestic product (GDP) fell by 3.3% in the fourth quarter of 2008, a shocking 12.7% annualized rate. The Confederation of British Industry has said the UK economy will shrink by 3.3% this year, a revision from the 1.7% decline it forecast as recently as November.
Damage control: (L to R) European Central Bank’s Jean-Claude Trichet, Eurogroup’s Jean-Claude Juncker and Economic and Monetary Affairs’ Joaquin Almunia at the end of the G-7 meet on 14 February in Rome. Tiziana Fabi / AFP
The finance ministers of the leading developed economies that make up the G-7 (Group of Seven) aren’t admitting that they have fallen behind. The communique from their Rome meeting last Saturday praised their own policy response—hyper-low policy interest rates and unconventional monetary policy—as “prompt and vigorous”, and its fiscal policies as “resolute”.
But the fightback is making little progress. Forecasts for GDP in 2009 keep falling around the world. And in spite of lots of government aid, the global credit system is at best limping along painfully. Few would argue with Jorma Ollila, president of mobile phone maker Nokia Oyj, who said the recession looked “far more difficult” now than a few months ago. No wonder he is budgeting for years of slowdown.
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Perhaps Ollila should give the policy response time to work. It has not yet been even six months since the tipping point of the crisis, the sudden collapse of Lehman Brothers Holdings Inc. Still, the G-7’s arsenal is running low. Interest rates are at or close to zero in all the major economies. The next step is printing money, which is a dangerous game.
If the pace of decline does not slow significantly soon, more unconventional responses will have to be considered. The menu of alternatives is a choice of greater and lesser evils: destructive protectionism, unpalatable bank recapitalizations or a one-time inflationary burst. But let the debate start now, before the curve gets too far ahead.