What Does the End of the Recession Look Like?

Flickr user Rich Anderson But what does it mean? Economic experts describe the end of the beginning of bad times.

Find the interviews linked here:

Louis Kuijs on China Shanta Devarajan on Africa Kyoji Fukao on Japan Allan H. Meltzer on the United States Jim O’Neill on emerging economies Robert Reich on the United States Edwin Truman on the United States and Europe

The worldwide recession may be nearing bottom or lifting, some data suggests. The rate of job losses has slowed. Financial and credit markets have eased. Ambitious stimulus plans seem to be working.

But these metrics hardly provide a qualitative understanding of what the world faces in the short to medium term — the next six to 24 months. What does the end of the recession really look like? And how will we know when we get there?

Foreign Policy surveyed the latest thinking and contacted top economic experts to get a better picture of the shape of things to come. We asked them to take out their crystal balls, assess whether the recession is lifting, and discuss what’s too often left out in the sometimes Pollyannaish press stories on green shoots.

Their consensus? The end of the recession looks much like the recession itself. We are at the end of the beginning of bad times.

On this page, you’ll find condensed versions of their assessments and warnings. Read on to find the interviews, which were lightly edited for clarity and slightly condensed.

China

The winner of the crisis. Beijing faces challenges in ensuring the correct type of growth. But China looks to be the world economy’s only real bright spot for some time in the future.

I think China’s had an extremely good crisis. It’s been good for China. It was very obvious to a few people, including some important policy people in Beijing, that the massive export growth of the past decade or so was just not sustainable on a permanent basis; it was heading for a collision anyhow. And in that case, something needed to change, so in some strange way the crisis has been convenient because it’s allowed them to make dramatic monetary and fiscal policy changes. — Jim O’Neill, head of global economic research for Goldman Sachs

The World Bank is not all that optimistic, over two years. China is a large economy, but quite integrated in terms of trade and inward FDI. So, what has happened now is: exports are still the main drag on growth. They’re very important for China, in terms of the importance of growth, more important than in India or Brazil…exports are important and will continue to be mediocre. What’s kept growth up is stimulus.

But you cannot undertake this large a stimulus for too many years in a row. Even China can’t undertake a stimulus next year. In terms of momentum, when we look at next year, we don’t really expect it to accelerate. It will grow respectably. — Louis Kuijs, senior economist for the World Bank in China

Japan

The situation in Japan — which has an aging population, a gutted pension program, and specialization in unwanted high-tech exports — seems especially fragile.

Japan’s recession started because of a sharp decline in Japanese exports. But the decline of exports has slowed down and the manufacturing sector activity has declined sharply, as did imports. That has a positive effect on GDP. Because of these factors, the negative growth has slowed down. That’s why the Bank of Japan says we’re at the bottom.

But our GDP is much lower, 10 percent lower, than what we can produce. So, still our situation is very bad. And, the problem is, what will be the engine of recovery? I don’t know. — Kyoji Fukao, professor at the Institute of Economic Research, Hitotsubashi University

Africa

With aid, investment, and commodity prices set to fall, the fallout of the global recession may be particularly harmful on the world’s poorest continent, rolling back years of development successes.

Basically, the African financial sectors were spared the initial round of bank failures and financial sector turmoil because African banks weren’t that integrated and weren’t dealing in derivatives and CDS and those sort of things. But when it turned into a real world economic crisis, when there was recession in developed countries, that immediately had a major impact on African countries on four main channels — FDI, remittances, commodity prices, and aid. In each of these channels, the effect on Africa was particularly devastating. — Shanta Devarajan, chief economist for the World Bank’s Africa region

The United States

The recession appears to be ending and recovery could start as early as the fall, economists concur. But, the recovery, described variously as a curved L, a Q, and a U — not a real V — may be a hesitant one.

Number one, we need a larger stimulus. That’s not a popular thing to say and congress probably wouldn’t approve such a thing. But the Fed has got to continue to pump a lot of money into the system. And we have to continue to run large deficits for a while. — Robert Reich, professor at the University of California, Berkeley, and former U.S. secretary of labor

The states are not, by their constitutions, allowed to run deficits. So they have to either cut services or raise taxes. Both moves slow the economy. The size of the shortfalls at the state and local level are staggering because revenues are down, while demands for public services are up, given the economy. So, the real challenge is: How can the administration help the states without going back to congress and seeking more stimulus? There may be ways for the federal government to absorb more Medicaid payments in the short term. Perhaps lending the states additional funds, perhaps helping with the states’ bonding authorities. But all of that is probably not enough. — RR

Our biggest long-term problem, which we should address during this transition, is that we’re going to have to export more to service the debt we’ve sold and are going to sell. Consumption growth has to slow down. We have to invest more to export more. That’s the very opposite of what [the administration is] doing. — Allan H. Meltzer, professor of political economy at Carnegie Mellon University

Well, things are not getting better. They’re just getting worse at a slower rate. I’ve dealt with journalists for many years, and they have a hard time distinguishing levels and rates of change. Distinguishing between first and second derivatives. That seems to be beyond their ability. They see the unemployment rate is falling less rapidly and they interpret that as a sign of recovery. — AM

Western Europe

The recession, as in the United States, seems to be lifting overall, but the diversity of Western Europe’s economies makes generalization hard. Countries with large stimulus plans, like Britain, will have shorter, lighter recessions. Exporters and countries with smaller stimulus plans, like Germany, might emerge later and face slower recovery.

Europe, as a whole in some average sense is bottoming out. But there’s less evidence of that than there is the United States. Clearly, there’s a lot of differentiation there. — Edwin Truman, senior fellow at the Peterson Institute of International Economics

We’re past the point of criticizing countries for not doing enough stimulus — they don’t need more stimulus at this point. Everything’s pointing in the right direction. Assuming no further catastrophes, I think the question of stimulus is in the past now. One can have disagreements about how much more stimulus there should have been or how fast it should be removed. But we’re on a second order of questions now.

But, I think you can be critical, even if it’s second- or third-order at this point. I think [Germany] should have done quite a bit more, and not been so stingy and free-riding on the rest of the world. But that’s bygones. The recession will end and the economy will recover. The worst is largely behind us. — ET

Eastern Europe and Russia

Emerging economies in Eastern Europe — particularly those with high current-account deficits before the recession hit, like Latvia — face an extremely difficult road. Their recession is not over, and recovery will be difficult. Growth will be depressed on a longer trajectory than in Western Europe. The region will likely require additional help from the International Monetary Fund. Political instability might well continue.

We’ve seen clearly in this crisis that Russia is dominated by oil too much. It’s as simple as that. [Among the BRIC economies], Russia is the weak one of the four. They have to diversify away from oil and improve their demographics. But, I think there are some modest examples of that developing. But if oil prices continue to rebound, [the government] needs to continue to address those fundamental problems. — JO

There will be problems down the road. I suspect that the IMF has not reached its peak in terms of lending and new programs, because of their role and the nature of the crisis. There will be countries that are affected by a lag in the recession in many parts of the world, and in Eastern Europe. Even today, you saw an opposition candidate in Bulgaria saying that they maybe Bulgaria needs to seek IMF stimulus. — ET