WILL THERE BE A NEW GLOBAL RECESSION?
Four megatrends in an uncertain economic climate
By Professor Carlos A. Primo Braga - January 2013
John Kenneth Galbraith once said that the "only function of economic forecasting is to make astrology look respectable." The temptation, however, is always there because of the high-stake social and political implications of economic downturns. Actually, there is a whole industry of economic consultancies, international organisations and "experts" that make a living off such forecasts.
Their track record is not particularly good. For example, the IMF, probably the most respected source of global economic predictions, released a forecast in October 2008, predicting that the world economy would grow 3% in 2009. The reality, however, was an economic contraction of 0.6%.
To make things even more complicated, there is no consensus on the definition of what constitutes a global recession. Even national definitions, eg, two consecutive quarters of decline in a country's real (inflation-adjusted) gross domestic product (GDP), are at best useful rules of thumb that are typically complemented by analyses of a broader set of macroeconomic indicators for establishing when a recession occurs.
Abstracting from the complexities of establishing a universal definition, this article simply adopts the rule proposed by IMF staff in 2009: a global recession entails a contraction in world real per capita GDP accompanied by a decline in other key indicators of global economic activity (eg, international trade, oil consumption, employment, industrial production, etc.). Against this benchmark, the probability of a global recession in 2013 is very low.
The regional picture
The rationale for such a prediction is simple: with world population growing around 1% per year, even anaemic growth in world output of around 2.9% (using market exchange rates), as currently predicted by the IMF for 2013, will provide enough cushion to dispel concerns about a global recession. Needless to say, aggregate numbers hide significant variance across nations. For example, weak macroeconomic performance in OECD countries will most likely continue to be the norm:
The good news is that, while high-income economies accounted for close to 75% of the world economy five decades ago, today their share is around 55%. In other words, the drag imposed by their weak performance on the world economy has been significantly reduced. Actually, one can expect emerging economies to continue to provide the main sources of world economic growth in the years to come. For example, the four largest emerging economies (the BRICs) are currently among the 10 leading world economies, and they are all expected to grow at a much stronger pace (in the 3.5% to 8% range in 2013) than their industrialised counterparts.
What does all this mean for business in 2013? Again, it is important to underscore that these broad macroeconomic trends represent only one piece of the puzzle facing the management of companies around the world. After all, there can be many dynamic niche opportunities in countries that are not performing particularly well. Still, the following megatrends, which are likely to prevail in the coming years independently of country-level accidents, should be considered in framing corporate strategies:
In sum, a global recession in 2013 is unlikely. Still, it will be a challenging year, but those companies willing to embrace globalisation and continue to invest in innovation are likely to prevail. Carlos Braga is professor of international political economy at IMD and director, Evian Group at IMD.
This article was originally prepared for the January/February 2013 issue of Research World.