Recovery-talk has been dominated by a discussion of letters. There’s the rapid V-, the protracted U-, the double-dip W-, and the dreaded L-shaped recovery. Recent positive economic signals have resuscitated hopes of a V-shaped rebound. Is it just hype, or do forecasters generally agree?
Opinions are varied and are also in flux, adding to the confusion. But today’s profusion of forecasts has given rise to consensus forecasting – the business of compiling and averaging forecasts – which can help to sort through the mixed messages. The merits of using the consensus outlook have been debated, but given the high current level of uncertainty, a good look at the consensus is illuminating.
All eyes are on the second half of 2009. The true shape of the recovery will largely be determined in the path that the global economy takes over this period. But here’s where the consensus gets murky. Forecasts are recorded on an annual basis, so the quarterly progression is not entirely clear. What helps is, knowing that for the third and fourth quarters, growth actually has less influence on the 2009 forecast than on next year’s outlook. As such, a quick look at the 2010 annual forecast actually gives a good idea of the expected quarterly progression of the economy.
What do the forecasters see? At first blush, 2010 projections might seem upbeat. After all, the world’s largest economies are returning to growth after punishing declines in 2009. Positive, yes, but in most cases barely so. Take the Eurozone, for instance. After a 4.3% contraction in 2009, pundits expect a rise of just 0.6%. Germany has a big influence on this outcome, with just 0.7% growth forecast for 2010 after a 5.8% decline this year. This implies quarterly growth averaging less than 1% at annual rates for the outlook period. The outlook for both the UK and France is little better, with implied quarterly gains at just over 1%, annualized. Japan is in the same boat. With annual growth pegged at 1.3% next year, quarterly growth averages 1.1%, annualized. As the current outlook stands, the consensus view for well over a quarter of world GDP says that a V-shaped recovery is not on.
Are things any better closer to home? The US economy is expected to outperform the other majors, expanding by 2.3% next year. Canada’s outlook is similar. What this implies is quarterly growth that looks like a more impressive 2.5% at annual rates. After what we’ve been through, the growth is a welcomed improvement. But it’s well shy of a typical rebound. Much stronger growth is needed to kick-start investment and employment, but as forecast, both economies would maintain activity at a level well below true productive capacity. In fact, the growth trajectory means both economies would take twice as long to climb back to the pre-collapse level of output than they took to fall. Again, no ‘V’.
In key emerging markets, the story is generally the same – growth returns to a decent pace, but still leaves the economies operating below potential. As in late 2008, the consensus outlook could change quickly, and based on recent data, is likely to be revised upward. But a significant departure from today’s consensus view would take a major – and as yet, unforeseen – economic event.
The bottom line? Talk of a V-shaped recovery is likely to remain just that. The consensus view is that one of the other letters will determine the recovery’s shape, and that the rebound is most likely to begin in the latter half of 2010. According to most, a fulsome recovery appears to be a 2011 thing.