Tuesday, October 9, 2012

The World's Stagnant Economy

Eswar Prasad and Karim Foda of the Brookings Institute released their most recent iteration of the TIGER or Tracking Indexes for the Global Economic Recovery indicator, a measure of the economic health of 20 nations.  According to TIGER, the world's economic picture, as we all suspect, is not particularly healthy as I posted back in July

The world's economy is "on the ropes" according to the authors despite endless meddling by the Federal Reserve, the ECB, the Bank of England, the Bundesbank and the relatively tiny Bank of Canada.  The authors note that the only "bright spot" in the world economy is the United States, however, with economic growth falling from a lukewarm 2.0 percent in the first quarter of 2012 to a downward revised 1.3 percent in the second quarter.  As shown on this graph, when looked at in historical terms, a growth rate of 1.3 percent should hardly be considered a "growth rate" at all:

As you can easily see, the second quarter 2012 GDP growth rate is among the lowest quarterly growth rates during an economic expansion since 2002. 

TIGER looks at three indicators; real activity, financial and confidence.  Real activity includes industrial production, imports, exports, employment and GDP.  Financial indicators include equity markets, stock market capitalization, credit growth, emerging market bond spreads and the TED spread.  Confidence indicators include consumer and business confidence.  Data is gathered for both advanced economies and emerging markets.

Let's take a look at a few of the interesting indicators starting with real activity.  Here is a graph showing industrial production over the period from January 2003 to July/August 2012:

The industrial production index has dropped to new post-Great Recession lows, well off its early 2010 highs.

Here is a graph showing GDP growth over the same period:

Here is a graph showing GDP growth just prior to, during and since the Great Recession:

GDP growth for advanced economies (blue line) is hovering around 1 percent and, for many nations including the United Kingdom, is actually less than zero.

Here is an interesting graph showing credit growth (or lack thereof for the world's advanced economies):

Since equity markets have historically been linked to the "wealth effect", here is a graph showing the dramatic drop in equity growth since mid-2010 and that, until recently, growth in equities was negative for only the third time in the decade:

Today's economic growth is driven largely by consumer spending and consumer spending is closely linked to consumer confidence.  Here is a graph showing dropping consumer confidence in both advanced and emerging economies:

While all of the indicators are at levels above their nadirs during the Great Recession, since mid-2010, the data points to a drop in every indicator.  Economic growth momentum has dropped and despite the efforts of Mr. Bernanke and his cabal of central bankers and their arsenal of monetary experiments, the world's economy seems loathe to grow.  Even China, the world's bastion of economic activity appears to be experiencing a slowdown as growth appears to be falling below the government target.  After all, as the supplier to the world's toy-hungry consumers, China's economy can hardly be expected to escape unscathed as the rest of the world slips into recession.

As I posted here, it may well be that the world's economy has reached the "fiscal cliff"; perhaps the unfettered growth of government debt is coming home to roost as governments around the world are unable to stimulate as they did at the depths of the 2008 - 2009 implosion.  Perhaps this time, the world's economy really is different and we'll be lucky if we're only stuck with stagnancy for the foreseeable future.


  1. I don't see how there can be infinite economic growth on a finite planet.