5 October 2009

A bear's 'bad feeling:' Is the recovery faltering?

This article is excerpted from the 5 October 2009 edition of “globeandmail.com”.

Paul Krugman sheepishly admits that he missed the strong stock market rebound of that past six months. But it's understandable, given the celebrated Princeton economic professor's bearish views on the economy and the precarious nature of the current recovery….

Prof. Krugman has long been one of the leaders of the bear clan when it comes to assessing the state of the economy. But he is being joined onstage by a growing chorus of economy watchers, policy makers and other voices, amid signs that the global turnaround fuelled by heavy government spending is sputtering.

A slew of warning flags have recently been posted along the recovery highway. And Prof. Krugman and others are wondering where the economic growth will come from once governments turn off the spending taps. Prof. Krugman said he has "a bad feeling" about the nature of this recovery and that governments should be pushing more stimulus into the economy, rather than worrying about how to cut back.

"In most of the things that matter, things are still getting worse," he said….

We need somebody to invent the equivalent of the railroad or Internet to get that happening again, he said.

His current views have been coloured by research showing that recessions triggered by financial crises persist longer, and the recovery depends heavily on the crisis-hit country scoring big export gains and large trade surpluses.

"Since this is a global financial crisis, we've got a problem. We can't all do that at the same time. So I'm worried that this could go on for a very long time."

That will mean stubbornly high jobless rates and stagnant growth in the industrial economies for a prolonged period….

In Canada, which has fared comparatively better, Finance Minister Jim Flaherty said he expects uncomfortably high levels of unemployment to persist well into next year, and that he is prepared to do more to help the jobless if the problem becomes worse than he currently foresees….

The International Monetary Fund last week raised its projection for global economic growth next year to 3.1 per cent from an earlier estimate of 2.5 per cent, citing increased factory output, more consumer confidence and newly stabilized financial markets. But Olivier Blanchard, the fund's chief economist, warned the risks to his forecast were to the downside because unemployment rates in the U.S. and Europe were on track to top 10 per cent….