Central bankers and governments around the world deserve to be congratulated. The global economy was perilously close to total collapse earlier this year. Economists Barry Eichengreen and Kevin O’Rourke had shown in an April research paper that the drop in world industrial production, trade and stock markets was worse than that during the early months of the Great Depression of the 1930s. Eichengreen and O’Rourke pointed out in a June update that world industrial production continued to drop at dizzying speeds, even as trade and stock markets had stabilized. But yet they saw no signs of green shoots.
Illustration: Jayachandran / Mint
There have been shreds of good news since. But it is too early to call the end of the global recession. The US Federal Reserve said last week that “economic activity is levelling out”, which is more a suggestion that the worst is over than a statement that the good times are here again. France and Germany unexpectedly announced on Thursday that their economies had grown by 0.3% between April and June, though economic activity in the eurozone continues to shrivel. China has reported robust numbers as well, even as there have been fresh doubts about the veracity of its economic data.
In short, this is a time to let out a sigh of relief rather than a whoop of joy: Things are not as bad as they seemed six months ago, but they are not back to normal either.
But the very fact that a repeat of the 1930s seems to have been avoided is a huge achievement, and much of the credit for that should go to the huge fiscal and monetary stimulus that was given by authorities around the world. Just one of the 42 major economies whose macroeconomic data is tracked every week by The Economist has a budget surplus; only eight others have deficits less than 4% of their gross domestic product. All other countries have large deficits now.
Eichengreen and O’Rourke have also shown that central bank discount rates (measured as a seven-country average) are significantly lower than they were in the year after June 1929. In other words, a flood of money has been released into the global economy to avoid the mistakes of 1929, when central banks tightened monetary policy despite the economic crisis.
But let’s not pop the champagne right now. No economic recovery will be sustainable till private consumer and corporate spending revive. There are no signs of life there. It’s all government right now.
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