The 2012 recovery: handle with care

by Martin Wolf

Financial Times
January 3, 2012

What does 2012 hold in store for the world economy? Let us start by looking at the battered high-income countries. Is there a good reason to expect healthy recoveries? Not really. The outcome in the eurozone might be a disaster that spreads around the world. Even the US recovery is likely to be fragile. The shadow cast by events before 2007 passes slowly.

The December consensus of forecasts is gloomy (see chart). The most recent views on likely growth this year are far below those expected a year ago. This is particularly true for the eurozone, which is expected to fall into recession. The economies of Italy and Spain are expected to contract, while France and Germany are expected to produce negligible growth. The UK is forecast to be in the same state as the eurozone's two largest members. Only Japan and the US are forecast to show anything close to reasonable economic growth this year. In the case of the US, growth was forecast at 2.1 per cent in December, up from 1.9 per cent in November.

Let us put this performance in context. In the third quarter of 2011, Canada was the only member of the Group of Seven leading high-income countries whose gross domestic product was much above its pre-crisis peak (see chart). The US and German economies were marginally above their pre-crisis peaks, while France was marginally below it. The UK, Japan and Italy were still far below their pre-crisis peaks. Recovery? What recovery?

Yet the highest interest rate now applied by the four most important central banks is the European Central Bank’s only 1 per cent. The balance sheets of these central banks have also expanded dramatically. Moreover, between 2006 and 2013, the ratio of gross public debt to GDP will jump by 56 percentage points in the UK, 55 points in Japan, 48 points in the US and 33 points in France. Why have such drastic policy actions brought forth such modest results?

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