tag:theconversation.com,2011:/id/topics/gdp-rate-3781/articles GDP rate – The Conversation2022-03-10T15:20:54Ztag:theconversation.com,2011:article/1786052022-03-10T15:20:54Z2022-03-10T15:20:54ZThe Russian economy is headed for collapse<figure><img src="https://images.theconversation.com/files/450535/original/file-20220307-44826-v4hdnx.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C6456%2C3740&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ordinary Russians are facing the prospect of higher prices as western sanctions over the invasion of Ukraine sent the ruble plummeting. That's led uneasy people to line up at banks and ATMs on Monday in a country that has seen more than one currency disaster in the post-Soviet era. </span> <span class="attribution"><span class="source">(AP Photo/Pavel Golovkin)</span></span></figcaption></figure><p>To justify invading Ukraine, <a href="https://www.theguardian.com/commentisfree/2022/feb/22/putin-speech-russia-empire-threat-ukraine-moscow">Vladimir Putin has painted Russia</a> as a hegemonic power re-asserting its rightful claim to imperial greatness. Yet even before the invasion, Russia’s economic capabilities were hardly capable of sustaining an empire. </p>
<p>Now, with foreign sanctions presiding over a plummeting <a href="https://www.britannica.com/topic/ruble">Russian ruble</a>, Russia’s economic standing has fallen further still. If measured at today’s exchange rates, Russia’s economy would be the 22nd largest in the world, with a <a href="https://www.investopedia.com/terms/g/gdp.asp">gross domestic product (GDP)</a> not much larger than the state of Ohio’s.</p>
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<img alt="Graph of Russia's ranking among the largest economies in the world at current market exchange rate" src="https://images.theconversation.com/files/450795/original/file-20220308-13-1ai9hpa.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/450795/original/file-20220308-13-1ai9hpa.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450795/original/file-20220308-13-1ai9hpa.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450795/original/file-20220308-13-1ai9hpa.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450795/original/file-20220308-13-1ai9hpa.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450795/original/file-20220308-13-1ai9hpa.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450795/original/file-20220308-13-1ai9hpa.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">With foreign sanctions presiding over a plummeting Russian ruble, Russia’s economic standing continues to fall.</span>
<span class="attribution"><span class="license">Author provided</span></span>
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<p>That’s a far cry from the past, when Russia was a true world power. According to <a href="https://www.rug.nl/ggdc/historicaldevelopment/maddison/?lang=en">data assembled by the late economic historian Angus Maddison</a>, it was the fifth largest economy in the world in 1913, behind the United States, China, Germany and Britain. By 1957, when the U.S.S.R. outpaced the United States to launch the first satellite into space, the Soviet economy was the world’s second largest after America’s.</p>
<h2>Putin’s quest for greatness</h2>
<p>Putin was elected president following the chaotic <a href="https://www.britannica.com/event/the-collapse-of-the-Soviet-Union">disintegration of the Soviet Union</a> and the 1998 financial crisis in which <a href="https://doi.org/10.1080/1060586X.1999.10641466">Russia defaulted on its debt and abandoned its fixed exchange rate</a>. </p>
<p>At the time, Russia’s market-value GDP had bottomed out at US$210 billion, <a href="https://www.imf.org/en/Publications/WEO/weo-database/2021/October">making it the world’s 24th largest economy</a>, behind Austria. (All contemporary GDP figures are from the <a href="https://www.imf.org/en/Publications/WEO/weo-database/2021/October">October 2021 World Economic Outlook</a> published by the International Monetary Fund.)</p>
<p>Putin established an <a href="https://www.nti.org/analysis/articles/state-russian-economy-balancing-political-and-economic-priorities/">informal social contract</a> with the Russian people based on his ability to deliver strong economic growth. Under Putin’s rule, and buoyed by a <a href="https://www.bankofcanada.ca/wp-content/uploads/2016/11/boc-review-autumn16-buyuksahin.pdf">commodity price supercycle</a> that would stretch well into the 21st century, Russia’s GDP in market exchange rates rose tenfold, returning Russia to global relevance and providing purchasing power to its middle class. </p>
<p>However, <a href="https://doi.org/10.1080/09668136.2016.1216949">Russia researchers argued</a> that as Russia’s economy began to flag, from a peak in 2013, Putin sought new legitimacy to govern through foreign policy actions to re-establish Russia’s status as a “<a href="https://doi.org/10.1177%2F1478929915623967">great power</a>.” These efforts were epitomized by the Crimean annexation of 2014.</p>
<p>Russia’s invasion of Ukraine, against the backdrop of Russia’s market-rate GDP losing a third of its value between 2013 and 2020, represents a doubling down of Putin’s strategy to seek legitimacy from “great power status,” rather than economic performance. </p>
<p>Yet the West’s unrelenting financial and economic sanctions have only accelerated <a href="https://www.theatlantic.com/newsletters/archive/2022/03/vladimir-putin-economy-sanctions-swift-fallout/623330/">Russia’s economic downfall</a>.</p>
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<img alt="People standing in line on a sidewalk" src="https://images.theconversation.com/files/450536/original/file-20220307-118221-1ub1qz1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/450536/original/file-20220307-118221-1ub1qz1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=416&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450536/original/file-20220307-118221-1ub1qz1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=416&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450536/original/file-20220307-118221-1ub1qz1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=416&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450536/original/file-20220307-118221-1ub1qz1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=523&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450536/original/file-20220307-118221-1ub1qz1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=523&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450536/original/file-20220307-118221-1ub1qz1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=523&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Ordinary Russians face the prospect of higher prices and crimped foreign travel as western sanctions have sent the ruble plummeting, leading people to line up at banks and ATMs on Feb. 25 in a country that has seen more than one currency disaster in the post-Soviet era.</span>
<span class="attribution"><span class="source">(AP Photo/Dmitri Lovetsky)</span></span>
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<p>Russian stocks traded on the U.K. market have fallen by 98 per cent, <a href="https://www.bloomberg.com/news/articles/2022-03-02/london-listed-russian-stocks-erase-570-billion-in-two-weeks">wiping out US$572 billion</a> of wealth, while stocks on Russian exchanges remain suspended. </p>
<p>The Russian currency has fallen to <a href="https://www.cnn.com/business/live-news/stock-market-news-russia-ukraine-030722/h_135238a56a8e8289176e5708633ff2c9">155 rubles per dollar — a drop of more than 50 per cent</a> from 75 rubles per U.S. dollar before the invasion. If not for <a href="https://www.wsj.com/livecoverage/russia-ukraine-latest-news-2022-03-09/card/moscow-limits-foreign-currency-trading-to-shore-up-struggling-ruble-dgTDTQdEOkO3wgoFyC3I">recent captial controls</a> and the rising prices of commodities — brought about by the sanctions themselves — that make up the majority of Russia’s exports, it would fall even further.</p>
<h2>Domino effect</h2>
<p>A country’s <a href="https://www.imf.org/external/pubs/ft/fandd/2007/03/basics.htm">market-rate GDP</a> is its GDP converted to a global currency like the U.S. dollar. While there are other ways to measure GDP, when it comes to global trade and investment — and economic power — the market rate is what matters. </p>
<p><a href="https://www.imf.org/en/Publications/WEO/weo-database/2021/October">Russia’s market-rate GDP in 2021 was US$1.65 trillion</a>, enough to make it the world’s 11th largest economy, behind South Korea. If we crudely convert Russia’s 2021 estimated GDP by March 7, 2022, currency rates, rather than the average exchange rate used last year, and place it against the <a href="https://www.visualcapitalist.com/visualizing-the-94-trillion-world-economy-in-one-chart/">2021 market-rate GDP table</a>, the rankings change and Russia slides to 22nd place, falling between Taiwan and Poland. </p>
<p>This drop is likely an underestimate. While a falling ruble lowers Russia’s exchange rate of its GDP to U.S. dollars, its <a href="https://www.theguardian.com/world/2022/mar/02/russia-economy-could-shrink-by-7-per-cent-as-result-of-ukraine-sanctions-war-recession-covid">weakening economy</a> lowers its ruble GDP directly. And <a href="https://www.cnn.com/2022/03/02/business/russia-markets-economy-sberbank/index.html">Russia’s isolation will erode its economic competitiveness</a>, widening the economic gap further in the medium term. </p>
<p>Ukrainians confronted with the oncoming Russian army were wise to Putin’s chimeric strategy. “Don’t you have problems in your country to solve? Are you all rich there, as in the Emirates?” one elderly <a href="https://www.thelondoneconomic.com/news/dont-you-have-your-own-problems-to-solve-russian-man-living-in-ukraine-confronts-soldiers-313783/">man heckled Russian soldiers</a>.</p>
<h2>Putin’s next move</h2>
<p><a href="https://www.jfklibrary.org/learn/about-jfk/the-kennedy-family/robert-f-kennedy/robert-f-kennedy-speeches/remarks-at-the-university-of-kansas-march-18-1968">Robert F. Kennedy famously observed</a> that GDP failed to account for many things that we care about — like health and education. The fall in Russia’s market-rate GDP cannot begin to describe the human tragedy playing out in both Ukraine and Russia. </p>
<p>But what these figures do make clear is that Putin’s claim to legitimacy through economic performance is all but destroyed. With “great power status” tied closely to economic power, Putin’s back-door source of legitimacy from stirring up nationalist pride now seems closed as well. </p>
<p>Putin may have led Russia from one “<a href="https://doi.org/10.1007/s11212-018-9298-0">Times of Troubles</a>,” but he has delivered it to another one. That’s cold comfort to the Ukrainians, and indeed to the rest of the world, who are wondering Putin’s next move.</p><img src="https://counter.theconversation.com/content/178605/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Eric Werker does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With Russia’s “great power status” tied closely to economic power, the country’s crumbling economy is putting Putin’s claims to legitimacy at risk.Eric Werker, William Saywell Professor of International Business, Simon Fraser UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/539412016-02-04T11:08:53Z2016-02-04T11:08:53ZHow do we know if we’re in a global recession?<figure><img src="https://images.theconversation.com/files/110215/original/image-20160203-5826-y8dnii.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Recessions affect us all.</span> <span class="attribution"><span class="source">Unemployed line via www.shutterstock.com</span></span></figcaption></figure><p>Since the start of this year, stock markets around the world have fallen as panicked investors have begun believing that the world is slipping into <a href="http://www.wsj.com/articles/a-global-recession-may-be-brewing-in-china-1439764500">economic malaise</a>. </p>
<p>This <a href="http://www.marketwatch.com/story/another-great-recession-threatens-world-financial-markets-2016-01-12">fear</a> has also driven down prices of commodities like oil and copper and impelled <a href="http://www.wsj.com/articles/central-banks-go-to-new-lengths-to-boost-economies-1454098658">some central banks</a>, like Japan’s, to make dramatic efforts to boost growth. The concerns are being magnified by memories of the <a href="http://www.cnbc.com/2016/01/15/a-recession-worse-than-2008-is-coming-commentary.html">worldwide recession of 2008 and 2009</a>, when many countries experienced widespread joblessness, business bankruptcies and homelessness.</p>
<p>While national and international leaders cannot prevent worldwide economic downturns, a coordinated response among them can mitigate some of the impact. But it’s hard to rally government resources to this cause without the ability to determine whether we are actually in a recession or not. </p>
<p>So how do we know when the world is in a <a href="http://www.barrons.com/articles/the-global-recession-of-2016-1450511060">recession</a> and such a response is needed?</p>
<h2>What <em>is</em> a recession?</h2>
<p>To answer this question, first we need to understand what it means to actually be in a recession. </p>
<p>The generally accepted – and rather broad – <a href="http://businessmacroeconomics.com/">definition of recession</a> is a period of time when economic activity declines. While most people agree with this, there is controversy over how to translate it into practice. </p>
<p>Currently, three methods are used to determine when the world is in a recession.</p>
<p><strong>1) Threshold definition</strong></p>
<p>One way of defining a recession is when world output falls below a certain benchmark or threshold. For example, if global gross domestic product grows <a href="http://news.sky.com/story/1564804/world-is-on-brink-of-new-recession-imf-warns">less than 2.5 percent or 3 percent</a> a year, that means the world is in a recession. </p>
<p>It’s a yardstick the <a href="http://www.imf.org/external/np/tr/2001/tr010924.htm">International Monetary Fund</a> has used in the past and some in the media still employ. </p>
<p>Why 2.5 percent or 3 percent? Doesn’t a recession suggest an actual <em>decline</em> in GDP? The thinking is that since the world’s population is growing rapidly, each person’s slice of the global economic pie shrinks unless the overall pie expands by the same pace. If the <a href="http://esa.un.org/unpd/wpp/Graphs/Probabilistic/POP/TOT/">world’s population</a> is growing at 2 percent a year, as it was during the 1990s, world GDP has to increase at least 2 percent to keep up.</p>
<p>Many people, including current economists at the IMF (see box 1.1 <a href="https://www.imf.org/external/pubs/ft/weo/2002/01/pdf/chapter1.pdf">here</a>), feel the threshold definition is problematic because if the world is growing at 3 percent then total production doubles roughly every quarter-century. Doubling output in such a short period of time, even if population increases, does not match the general definition’s spirit of declining economic activity.</p>
<p>Nevertheless, the world is currently nowhere close to being in a recession by this definition, since the <a href="https://www.imf.org/external/pubs/ft/weo/2016/update/01/index.htm">IMF estimates</a> that world GDP will grow by 3.4 percent in 2016 and 3.6 percent in 2017, compared with <a href="http://www.worldometers.info/world-population/">population growth</a> of barely more than 1 percent.</p>
<p><strong>2) GDP definition</strong></p>
<p>A second definition of recession is when GDP falls two quarters in a row. This definition is <a href="http://www.investopedia.com/terms/r/recession.asp">widely known</a>, often quoted in the press and more closely matches the idea of declining activity since GDP is currently the best measure of what countries and the world produce.</p>
<p>The best way to calculate the world’s actual GDP is to simply add together the quarterly GDP figures provided by every country. Unfortunately, this simple method has a number of problems. </p>
<p>First, some countries provide only yearly data, like the <a href="http://www.cbsi.com.sb/">Solomon Islands</a>, while others in the midst of civil war or strife, such as <a href="https://www.chathamhouse.org/sites/files/chathamhouse/field/field_document/20150623SyriaEconomyButter.pdf">Syria</a>, Yemen and <a href="http://www.cbl.gov.ly/ar/images/stories/bohot/bulletinQ2.pdf">Libya</a>, cannot provide any information. </p>
<p>None of these countries is a major economic power, of course, so their data woudn’t make a huge difference to the end result. But if the world is on the knife edge of being or not being in a recession, knowing what is happening economically in small countries or in war-torn areas could be the determining factor in deciding if the world overall is expanding or contracting.</p>
<p>Second, some very large countries like the U.S. and India revise their GDP figures very frequently. U.S. GDP figures are <a href="https://www.bea.gov/papers/pdf/fixler_gdp_revise.pdf">revised a minimum of three times</a> and then are periodically revised roughly every five years as better data become available. It is hard to determine if the world is in a recession if a key country’s data are constantly being modified.</p>
<p>It is doubtful the world is currently in a recession based on the two consecutive quarters of negative GDP growth definition. While the U.S.‘ most recent figure of <a href="http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm">0.7 percent</a> growth in the fourth quarter of 2015 was lower than expected, it was not negative. OECD tables that <a href="https://stats.oecd.org/index.aspx?queryid=350">track quarterly growth</a> among the largest countries show a few negative numbers in places like Brazil and Greece, but the vast majority of the world’s economies have positive values.</p>
<p><strong>3) Committee of experts</strong></p>
<p>The third method of determining if the world is in a recession is to ask a nonpartisan panel of wise men and women. Both Europe and the U.S. use this method to determine – officially – if either is in a recession.</p>
<p>In Europe, <a href="http://cepr.org/content/euro-area-business-cycle-dating-committee">nine people</a> associated with the Centre for Economic Policy Research, or CEPR, make the determination. In the U.S., an <a href="http://www.nber.org/cycles/members.html">eight-person</a> committee at the National Bureau of Economic Research, or NBER, carries out the same task.</p>
<p>Both committees comprise academics who look at a wide <a href="http://www.nber.org/cycles/general_statement.html">variety of economic data</a>. When the committee concludes (by consensus) that the economy is declining, it declares a recession; when it decides the economy has resumed expanding, it declares the end of the recession.</p>
<p>The primary problem with wise advisers is that by design there is no consistent methodology. Each recession is treated as a unique experience that is assessed using a wide variety of data.</p>
<p>The other problem is that the process is historical. Until the committee makes its declaration – usually not until long after a recession has begun – no one is really sure of the state of the world. Finally, it is much harder to do this for the world than for a country because there is a wider variety of data to consider.</p>
<p>Is the world in a recession based on the opinion of the experts? This is impossible to know since neither CEPR or the NBER makes statements ahead of any pronouncement.</p>
<h2>A new alternative definition</h2>
<p>I believe it is time for a new definition to be added to the list: a recession is when the growth of GDP per capita is negative for at least half a year. </p>
<p>This is a modification of the threshold and GDP definitions and simply means that a recession is whenever the average person’s piece of the world’s economic pie shrinks for a sustained period of time. </p>
<p>Currently, <a href="http://databank.worldbank.org/data/reports.aspx?Code=NY.GDP.PCAP.CD&id=af3ce82b&report_name=Popular_indicators&populartype=series&ispopular=y">GDP per capita</a> has been growing about 1 percent per year, after shrinking a dramatic 6 percent during the 2008-09 economic downturn.</p>
<p>I prefer this new definition because it is useful not only when population is rising but also useful in places like Japan and Eastern Europe where <a href="http://esa.un.org/unpd/wpp/Publications/Files/World_Population_2015_Wallchart.pdf">population is or will be falling</a>. </p>
<p>While not all GDP and population data can be <a href="http://blogs.wsj.com/chinarealtime/2016/01/27/china-gdp-growth-could-be-as-low-as-4-3-chinese-professor-says/">trusted completely</a>, it is important to handle both rising and falling populations. Classifying a country that experiences a 1 percent decline in GDP when population falls by 3 percent as “in a recession” does not make sense for the reasons explained above. </p>
<h2>What can be done?</h2>
<p>There are numerous international treaties and organizations designed to coordinate <a href="https://www.wto.org/">world trade</a>, <a href="http://www.nato.int/">defense</a> and <a href="http://www.who.int/en/">global health</a>. </p>
<p>However, presently there is no organization that has the mandate to define, determine or coordinate a response to an international recession. The lack of a responsible organization is a huge problem since global recessions affect all of us. </p>
<p>Whatever definition is chosen, it needs to be simple enough to be widely understood, be easy to make accurate forecasts and handle countries that have declining populations as well as rising ones.</p>
<p>I don’t believe the world is presently in a recession, based on my preferred method. Nevertheless, sooner or later the world will experience another economic downturn. When this happens we cannot hope that an individual country changing its economic policies will cure a global problem. </p>
<p>Instead, today we need an international organization to define and declare global recessions and marshal a global response to return the world to prosperity.</p><img src="https://counter.theconversation.com/content/53941/count.gif" alt="The Conversation" width="1" height="1" />
Stock markets have been falling all year on concern the world risks slipping into a recession, which begs the question: how would we know if we were in one?Jay L. Zagorsky, Economist and Research Scientist, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/472552015-09-11T03:39:13Z2015-09-11T03:39:13ZData indicates the recession is effectively here; it’s what policy makers do next that counts<p>The latest economic figures released by the Australian Bureau of Statistics (<a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5206.0/">ABS</a>) have fuelled the debate on the future of the Australian economy and prompted many to ask: “Will Australia go into a recession?” </p>
<p>This question is legitimate, but off the mark. In fact, the data tells us that we should not be worried about going into recession. </p>
<p>What we should worry about instead is how to get out of the recession. Because, like it or not, the recession is already here and the sooner we acknowledge the problem, the sooner we can start the recovery.</p>
<h2>So, what does the data say?</h2>
<p>According to ABS, trend Gross Domestic Product (GDP) growth in Australia in the second quarter of 2015 was 0.5%. This was only marginally below the rate observed in the first quarter of the year (0.6%). The implied annual growth rate of GDP is therefore around 2%.</p>
<p>While considerably below the long-term average of 3.25% a year, trend growth is still positive, which means that Australia is not technically in a recession.</p>
<p>Economists technically define a recession as a period of at least two consecutive quarters of negative GDP growth. This occurs rarely in an advanced economy like Australia.</p>
<p>The last time Australia was technically in recession was 24 years ago, when trend growth turned negative in the third quarter of 1990 and did not go back to positive until quarter four of 1991.</p>
<p>Before then, trend growth was negative for five quarters between 1982 and 1983, for two quarters in the middle of 1974, and for four quarters between 1960 and 1961. </p>
<p>However, while not being technically in a recession, Australia today shows most of the symptoms of recession.</p>
<h2>Reload: what does the data say?</h2>
<p>First of all, trend GDP is by construction smoothed. However, recessions (and expansions) are cyclical phenomena that are better represented by seasonally adjusted GDP.</p>
<p>In the second quarter of 2015, seasonally adjusted GDP in Australia grew by a mere 0.2%, sharply down from the first quarter when it grew by 0.9%. That is, seasonally adjusted data suggests that the country is much closer to the beginning of a technical recession.</p>
<p>Second, seasonally adjusted Gross Domestic Income (GDI) showed negative growth of -0.4%. This is particularly worrying because GDI is statistically <a href="https://theconversation.com/the-true-state-of-queenslands-economy-without-the-spin-35959">more reliable</a> than GDP as a predictor of the cyclical fluctuations of the economy. </p>
<p>Third, and probably even more importantly, indicators of an individual’s welfare are taking a turn for the worse. The second quarter of the year saw negative growth in GDP per capita (-0.2%) and net national disposable income per capita (-1.2%). </p>
<p>These negative income dynamics add to persistently weak labour market performance. </p>
<p>The <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6202.0Main+Features1Aug%202015?OpenDocument">ABS labour force survey</a> shows that seasonally adjusted unemployment reached 795,500 units in July 2015. This is the highest level since November 1994 and approximately 125,000 units higher than at the peak of the global financial crisis (June 2009). The corresponding unemployment rate was 6.3%.</p>
<p>In the same month of July 2015, youth unemployment increased to 13.8%. This was the first monthly increase since the beginning of the year. </p>
<p>Perhaps this is not technically a recession, but certainly it looks, smells and feels a lot like one. </p>
<h2>Intervention needed</h2>
<p>The government, however, seems to be in denial. </p>
<p>Finance Minister Mathias Cormann is <a href="http://www.news.com.au/finance/economy/australias-economy-has-slowed-to-a-crawl-prompting-fears-we-may-be-slipping-into-a-recession/story-fnu2pwk8-1227511065914">reportedly</a> “very optimistic about the outlook moving forward”. Treasurer Joe Hockey <a href="http://www.news.com.au/finance/economy/australias-economy-has-slowed-to-a-crawl-prompting-fears-we-may-be-slipping-into-a-recession/story-fnu2pwk8-1227511065914">recently said</a> that “the Australian economy is showing a deep resilience that people in Canada and elsewhere would die for.”</p>
<p>Unfortunately, the fact that Canada is in a technical recession and other resource-intensive countries are suffering from falls in commodity prices does not make the situation of Australia any better.</p>
<p>Conversely, the business sector seems to have understood the reality of the situation. This is evident, for instance, in the declining levels of business confidence and conditions reported by the <a href="http://business.nab.com.au/nab-monthly-business-survey-july-2015-12396/">NAB Monthly Business Survey of July 2015</a>. </p>
<p>The good thing about recessions is that, generally, they end. The bad thing, instead, is that their effects are felt proportionally more by households at the bottom end of income distribution. </p>
<p>Another bad thing is that the consequences of a recession (in terms of unemployment and reduced welfare, for instance) tend to outlive the recession itself. </p>
<p>For all these reasons, some form of intervention would be desirable; but how?</p>
<p>In Australia’s case, the <a href="http://www.sciencedirect.com/science/article/pii/S0313592615300242">empirical evidence</a> clearly indicates that fiscal stimulus works: for each dollar spent by the government, GDP increases by more than one dollar. </p>
<p>In fact, already now, what has prevented the country from recording negative GDP growth is good old Keynesian spending. </p>
<p>Government final consumption grew by 2.2% in the second quarter of the year and 4% since the beginning of the year. Public gross fixed capital formation increased by 4% in the second quarter. </p>
<p>Without this extra public spending Australia would probably have experienced its first quarter of negative growth.</p>
<p>Certainly, Australia also has structural problems that condition its longer-term performance and that a fiscal stimulus will not solve. But the stimulus will improve the short-term outlook, restore confidence and create favourable socioeconomic conditions to undertake structural reforms.</p>
<p>To get there, however, an initial step is required: the government must get past its denial of the problem. Let’s hope that this happens sooner rather than later.</p><img src="https://counter.theconversation.com/content/47255/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the piecewise linear continuous model and its applications in macroeconomics.</span></em></p>Technically, Australia isn’t in recession; but data shows we are effectively in a situation of negative growth.Fabrizio Carmignani, Professor, Griffith Business School , Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/470362015-09-03T20:06:31Z2015-09-03T20:06:31ZAustralia’s economy is slowing: what you need to know<p>Australia’s economy grew by just 0.2% in the June quarter, below expectations of 0.4%, largely as a result of reduced mining and construction activity and a decline in exports of 3% during the quarter. </p>
<p>Nominal Gross Domestic Product grew by 1.8% during the year, which the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5206.0Main%20Features2Jun%202015">Australian Bureau of Statistics said</a> was “the weakest growth in nominal GDP since 1961-62”. Despite this, Australia has now recorded 24 straight years of growth. </p>
<p>The news has some analysts and economists spooked, and politicians blaming each other for the slowdown.</p>
<p>Treasurer Joe Hockey said:</p>
<blockquote>
<p>At a time when other commodity based economies like Canada and Brazil are in recession, the Australian economy is continuing to grow at a rate that meets and sometimes beats our most recent budget forecasts.</p>
</blockquote>
<p>He also said it was “factually wrong” to say it was the weakest growth since 1961.</p>
<blockquote>
<p>The fact is that the economic growth we had in the last quarter was in line with expectations. Of course it bounces around from quarter to quarter, but it was in line with our overarching expectation to have two and a half per cent growth in the last financial year.</p>
</blockquote>
<p>Shadow Treasurer Chris Bowen said:</p>
<blockquote>
<p>Growth has flat-lined since the Abbott government’s first damaging budget last year and cost of living pressures are continuing to increase. This is the biggest quarterly decline in living standards since the global financial crisis.</p>
<p>This is a very weak set of figures and for the government to cast around for international comparisons to try and make it sound better is a pretty pathetic excuse.</p>
</blockquote>
<iframe src="https://charts.datawrapper.de/VlSW8/index.html" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="400"></iframe>
<hr>
<p><strong>The Treasurer says Australia is still doing better than Canada, Brazil, the US and New Zealand. How should people view these numbers in a global context? To what extent is the slowing rate of growth due to global economic headwinds, and to what extent is it due to domestic factors?</strong></p>
<p><em>Griffith Business School Professor Fabrizio Carmignani answers:</em></p>
<p>In the past, the Australian economy has proved to be quite resilient to global economic shocks. Today we are facing what could be potentially a perfect storm. </p>
<p>For one thing, international commodities prices are very volatile and have resulted in a sharp contraction of Australian’s terms of trade. For another, China is going through a complicated economic phase and it is not, at this moment, the same solid anchor for the Australian economy as it might have been previously. So, it is not surprising to see that on a seasonally adjusted basis, quarterly growth in Australia has been oscillating between 0.2% and 0.3% for the last five quarters. </p>
<p>We owe it to some good old Keynesian stimulus on the demand side (read: government consumption and to a lesser extent public gross fixed capital formation) if we are not entering a technical recession.</p>
<p>The comparison with Canada, on surface, is favourable to Australia. Canada has officially entered a recession after recording two consecutive quarters of negative GDP growth in the first half of 2015. This is essentially due to low oil prices. However, according to media reports, Canada is still committed to achieving a target of annual growth of 2.5% this year, which is exactly what the Treasurer has stated for Australia. So, it seems to me that the difference between Australia and Canada here is thinner that what might appear at first sight. A fraction of a percentage point below or above the zero growth line is not really indicative of substantially different structural positions. </p>
<p>Both Australia and Canada are facing similar challenges in terms of diversification. The current “crisis” to me shows that these challenges are still far from being fully addressed in both countries. </p>
<p><strong>Australia has had 24 years of consistent growth. How much of this can we attribute to the mining boom? And given the cyclical nature of the economy, can we expect a downturn?</strong></p>
<p><em>Griffith University Professor Tony Makin answers:</em></p>
<p>Australia has performed relatively well compared to other OECD economies over recent decades, though did actually experience a recession during the GFC according to income and production measures of GDP. </p>
<p>Taking population growth into account, Australia’s economic performance since the global financial crisis has been worse than the raw GDP numbers show. On a per capita basis, national income has grown on average below one per cent per annum, less than half the almost two and a half per cent per head per annum average rate in the decade before the GFC.</p>
<p>The extraordinary boost to the terms of trade from the world commodity price hike, especially between 2005 and 2011, substantially raised Australia’s international purchasing power. However, GDP growth during the mining boom was actually less than during the economic reform era from the mid-1980s through to the end of the 1990s when commodity prices were fairly flat. </p>
<p>The main culprit for Australia’s sub-normal economic growth in recent years has not been falling commodity prices, which have undoubtedly played a role, but Australia’s underlying competitiveness problem, combined with a productivity slowdown that began from the turn of the century. </p>
<p>While the recent depreciation of the dollar will go some way to restoring Australia’s competitiveness and help stave off recession, genuine productivity-enhancing reform focusing on the economy’s supply side remains as important as ever for returning GDP and income per head growth to long-term average rates. </p>
<p><strong>One journalist at Wednesday’s press conference said the new data showed “the weakest growth since 1961”, but the Treasurer said that was factually wrong. Who is right?</strong></p>
<p><em>UNSW Australia Professor Richard Holden answers:</em></p>
<p>The statement that it is the slowest growth since 1961 seems, to me, to be false. We have had recessions in the 1990s and 1980s, which is two successive quarters of negative growth. And yesterday we had positive growth, so it was a slowdown but not the worst we have seen since 1961. I think the journalist’s statement doesn’t seem correct to me, on the face of it. I think the Treasurer is right.</p>
<p>It is possible the journalist was referring to the Australian Bureau of Statistics comment yesterday that:</p>
<blockquote>
<p>GDP growth for 2014-15 was 2.4%. Nominal GDP growth was 1.8% for the 2014-15 financial year. This is the weakest growth in nominal GDP since 1961-62.</p>
</blockquote>
<p>Nominal growth and growth are not quite the same thing. <a href="http://www.businessinsider.com.au/australias-economy-just-posted-its-worst-nominal-growth-since-1962-2015-9">Nominal growth</a> means GDP growth that is not adjusted for inflation.</p>
<p>But yes, yesterday’s numbers are still below projected growth. It is below market expectations. I think the Treasurer saying we have projected 2.5% annual growth this year and this is basically on target is a bit disingenuous. This is slow growth, it’s actually very troubling.</p>
<p>I understand the Treasurer can’t talk down the economy so his comments are understandable and he is in a difficult position. But the low rate of growth is genuine cause for concern. </p>
<p>I have <a href="https://theconversation.com/forget-about-a-currency-war-well-have-bigger-worries-off-a-weaker-yuan-46072">written before</a> about the concept of secular stagnation, which is the idea that growth of advanced economies looks like it has slowed down dramatically. The figures yesterday are further evidence of that theory.</p>
<p><em>Victoria University Senior Research Fellow Janine Dixon answers:</em></p>
<p>While it is factually correct that real GDP – the volume of production in the economy – has grown, the low growth in nominal GDP points to an underlying weakness in the economy. This is our exposure to the very large fall in commodity prices. When we translate real GDP into real income, we take into account that fact that the prices of the things we produce for export have fallen relative to the prices of the things we consume, some of which are imported. This has been a very important determinant of real incomes in the last few years.</p>
<p>Real net national disposable income is a better measure of our living standards than GDP. As well as adjusting for prices, we take into account the fact that some of the income generated domestically actually accrues to the rest of the world if the factors of production are foreign owned. We also deduct the value of capital that is “used up” or depreciated during the year. </p>
<p>Real net national disposable income per person has now failed to grow for 14 quarters in a row. This represents the most sustained fall in standards of living in the last 50 years.</p>
<p>What’s especially interesting about this period is that falling incomes have not been associated with falling output or particularly high unemployment. In the 1990-91 recession (the one we had to have) or the early 1980’s, incomes fell, but the solution to the problem was fairly clear. More than 10% of the workforce was unemployed. Fixing unemployment would boost production, incomes and living standards.</p>
<p>This time around, incomes are falling because commodity prices are falling. Commodity prices, set on world markets, are largely out of our hands. The labour market is much more flexible these days, and unemployment is 6%, not 10%. We are left with just one way to turn things around. In the words of Nobel laureate Paul Krugman, “Productivity isn’t everything, but in the long run it is almost everything”.</p>
<p><strong>Is GDP really in line with expectations, both of the government and the market?</strong></p>
<p><em>Griffith University Professor Ross Guest answers:</em></p>
<p>These GDP expectations are continuously being revised down as new information comes to hand.</p>
<p>The projected growth is lower than nearly everybody expected and everybody is having to revise downward their expectation. </p>
<p><strong>What will the slowing annual growth mean for the federal budget, which had forecast growth for 2015-16 of 2.75%?</strong></p>
<p><em>Ross Guest answers:</em></p>
<p>If growth were to remain at its current level of 2%, the budget deficit would be A$15 billion larger, in ball park terms, than the government projected. To put that in perspective, the total amount we spend on unemployment benefits is A$10 billion.</p>
<p>Australia living standards and the Australian government budget are being hit by a perfect storm of lower commodity prices and lower productivity growth.</p>
<p><em>Victoria University Senior Research Fellow Janine Dixon answers:</em></p>
<p>The GDP growth forecast for 2015-16 is fairly subdued at 2.75% and the budget not overly ambitious – a deficit of 2% of GDP. The trouble lies in 2016/17 and beyond, when annual GDP growth is forecast to be above 3%.</p>
<p>Over the next five years a couple of downside risks exist that will make it unlikely that GDP will grow this strongly, and consequently the budget’s return to surplus will be more difficult to achieve.</p>
<p>If the terms of trade fall further than allowed for in the budget forecasts, and if productivity growth remains weak, as it has been in recent years, real national income could be 3% lower than forecast by 2020. Roughly, this means the tax base for the government will be 3% smaller than expected. Rather than having a balanced budget by 2020, we would still be running a deficit, of around 0.75% of GDP or $12 billion in today’s terms.</p><img src="https://counter.theconversation.com/content/47036/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow. </span></em></p><p class="fine-print"><em><span>Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the multivariate piecewise linear continuous model and its applications in macroeconomics.</span></em></p><p class="fine-print"><em><span>Ross Guest has received ARC funding in the past.</span></em></p><p class="fine-print"><em><span>Tony Makin is affiliated with the Centre for Independent Studies and has previously consulted for the Minerals Council of Australia.</span></em></p><p class="fine-print"><em><span>Janine Dixon does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia has had 24 years of consistent growth. Is it all about to come to a crashing end?Richard Holden, Professor of Economics, UNSW SydneyFabrizio Carmignani, Professor, Griffith Business School , Griffith UniversityJanine Dixon, Senior research fellow, Victoria UniversityRoss Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityTony Makin, Professor of Economics, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/408232015-04-28T20:07:37Z2015-04-28T20:07:37ZWhy the Federal Budget is a textbook policy dilemma<p>A standard principle in economic policy-making is that if you have only one tool, then you cannot achieve two distinct objectives.</p>
<p>The problem for prime minister Tony Abbott is, in fact, even worse: he has one tool to pursue two objectives that are not just distinct, but even conflicting.</p>
<p>The tool is fiscal policy or, more precisely, the combination of expenditure and taxes which generates a certain fiscal balance. Fiscal policy can be either expansionary (that is, more expenditure and/or less taxes) or restrictionary (less expenditure and/or more taxes).</p>
<p>The objectives are (a) ensuring that fiscal position and debt are sustainable (debt stabilisation) and (ii) stabilising the cyclical fluctuations of production and unemployment (output stabilization).</p>
<p>These two things require opposite policies. Debt stabilisation requires a restrictionary fiscal policy. Output stabilisation - given Australia’s current economic outlook - requires an expansionary fiscal policy.</p>
<h2>Bad news from Washington</h2>
<p>The Australian economy is going through a contraction. This has been known for a while.</p>
<p>However, the news here is that this contraction seems to be deeper and longer than expected. This is suggested by the output gap data reported in the World Economic Outlook (WEO) of the International Monetary Fund.</p>
<p>The output gap is the difference between actual GDP and its trend level, expressed in a percentage of the trend. A negative output gap indicates that the economy is below potential; that is, in a contraction.</p>
<p>In the October 2014 issue of the WEO, the output gap in Australia in 2014 was estimated to be -0.095%. This figure has been revised to -1.4% in the <a href="http://www.imf.org/external/pubs/ft/weo/2015/01/weodata/index.aspx">April 2015 issue</a> and projections indicate that the output gap will remain negative in 2015-16. </p>
<p>Australia Bureau of Statistics (ABS) data also show that throughout 2014, Gross Domestic Income (GDI) has grown <a href="http://www.rba.gov.au/statistics/tables/">much less than GDP</a>.</p>
<p>While both GDI and GDP measure output, GDI is statistically more reliable in the short term. Its slow growth is therefore a further indication that the Australian economy is probably weaker than we thought.</p>
<p>At the same time, the WEO data suggests that the government’s fiscal position might also be worse than expected six months ago (see table below for a comparison).</p>
<p>More specifically, the primary balance is now projected to remain negative until 2018, with gross debt increasing above 40% in 2016 and declining no earlier than 2019.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=221&fit=crop&dpr=1 600w, https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=221&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=221&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=278&fit=crop&dpr=1 754w, https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=278&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=278&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<h2>The multiplier effect</h2>
<p>Output contraction calls for expansionary fiscal policy measures.</p>
<p>Some might argue that more expenditure (and/or lower taxes) does not increase output and hence does not help the economy recover from a contraction.</p>
<p>But <a href="https://www120.secure.griffith.edu.au/research/file/dd80d33e-ccac-46f9-ac58-d9ff7d41b5b7/1/2014-08-does-government-expenditure-multiply-output-and-employment-in-Australia.pdf">consider the figure below</a>. It shows the percentage change in Australian GDP over 20 quarters for a 1% increase in government consumption in quarter 0.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=433&fit=crop&dpr=1 600w, https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=433&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=433&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=545&fit=crop&dpr=1 754w, https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=545&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=545&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>On impact, GDP increases by 0.16%. The response remains positive in the first year. Afterwards, it becomes statistically not different from zero, but it never turns negative.</p>
<p>The cumulative effect is that output increases by $1.20 for every extra dollar spent on government consumption.</p>
<p>Hence, in Australia, government consumption has a positive multiplier effect. This multiplier effect is the reason why the Australian government should pursue expansionary fiscal policies when facing an economic contraction.</p>
<p>Of course, an increase in expenditure is not exactly what would help the government redress its fiscal deficit. Hence, Abbott and treasurer Joe Hockey have a fiscal policy problem: to expand or to restrict?</p>
<p>If Hockey opts for a fiscal expansion, he will facilitate the recovery, thus putting an end to a period of growing unemployment and uncertainty; but he will have to accept more deficit and debt.</p>
<p>If he chooses a fiscal restriction, he will stop debt from increasing, but will also make the contraction worse. Yes, because the multiplier effect also works in reverse: for every dollar of expenditure cut, Australian GDP decreases by $1.20.</p>
<p>Admittedly, the choice is not easy. Or is it?</p>
<h2>A matter of priorities</h2>
<p>A 40% debt to GDP ratio is not really a problem. It is low by any international standards and well below the threshold above which it might reduce economic growth.</p>
<p>A contraction instead is a problem because it directly affects the welfare of individuals, especially those at the bottom end of income distribution.</p>
<p>A contraction also causes uncertainty, which in turn reduces business confidence and investment, with negative effects on the economy’s long-term growth potential.</p>
<p>Shouldn’t then output stabilisation (that is, facilitating the recovery) have priority over debt stabilisation?</p>
<p>This does not mean that debt should be allowed to grow unchecked. If the government pursues an expansionary fiscal policy in time of contraction, then in time of economic recovery it will have to tighten fiscal policy.</p>
<p>In this way, the deficit generated during the contraction is offset by the surplus realised during the recovery. The result is that the fiscal policy position will be stabilised over the medium term and debt will not accumulate.</p>
<p>The 2015/16 budget provides the government with the opportunity to start implementing this pattern of “counter-cyclical” fiscal policy. But so far there has been little sign the government sees it this way.</p><img src="https://counter.theconversation.com/content/40823/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the continuous piecewise linear model and its macroeconomic applications.</span></em></p>It’s economics 101: to pay down debt, you must restrict spending or raise taxes. To stoke an economy, you’ve got to do the opposite. So which way will this government go?Fabrizio Carmignani, Professor, Griffith Business School , Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/223632014-01-24T06:58:01Z2014-01-24T06:58:01ZToo soon to celebrate: a flawed obsession with economic stats<figure><img src="https://images.theconversation.com/files/39787/original/6d5zvknk-1390505431.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Measuring growth can be tough.</span> <span class="attribution"><span class="source">woodleywonderworks</span></span></figcaption></figure><p>So the International Monetary Fund has revised its economic growth forecast for the UK upwards. It now <a href="http://www.bbc.co.uk/news/business-25823217">expects 2.4% growth</a> in the UK this year, up from the 1.9% they predicted a few months back. Cue <a href="http://www.dailymail.co.uk/news/article-2543039/Boost-Osborne-IMF-upgrades-UK-growth-Economic-outlook-improved-major-nation.html">celebratory articles</a> across the media, and welcome reaction from the <a href="http://news.sky.com/story/1198691/osborne-hails-new-imf-growth-forecast-for-uk">government</a>, business groups and economists.</p>
<p>Why not? This is good news, right? Well, not necessarily. The way these forecasts are venerated, along with other statistics such as productivity growth or inflation or house prices, betrays a fundamental misunderstanding of how they are produced, what they mean, and how important they are. </p>
<p>First, these numbers are averages of often revised inputs. Second, they are conceptually very loose. Whose consumption basket is being measured by inflation? That of young families, pensioners with health problems or football millionaires? At best they give delayed indications of general trends (though because of the frequent and long-delayed large revisions, these are mainly of interest to economic historians). Reporting unemployment or inflation with decimal places, for example, is simply hilarious. </p>
<p>Media, government and industry are all guilty of paying too much attention to these numbers, and endowing them with quasi-religious symbolism. Rather, policy should be focusing on helping people adjust as economies evolve. It is a mistake which, in the long term, has the potential to be hugely damaging to the financial wellbeing of individuals, businesses and the country as a whole.</p>
<p>The ritual of macroeconomic stabilisation policy begins with forecasts. Remember the most salient fact: there is no organisation, public or private, which can boast any sustained record of effective macroeconomic forecasting. In particular, the world’s central banks have elaborate mathematical models that have managed to miss every turning point in their own economies. We should not be surprised that they are surprised.</p>
<p>The most compelling recent example in the UK has been that latest figures reveal unemployment <a href="http://www.bbc.co.uk/news/business-25841570">down to 7.1%</a>, edging closer to the 7% threshold at which the Bank of England not long ago said it would consider whether or not to raise interest rates. At the same time, the bank said that it thought that this moment might be a couple of years away. Surprise. But with many judging that the UK is not ready for a rate rise yet, the bank’s position has primarily caused market confusion and uncertainty. And of course, the number might be, retroactively, revised upwards again in a few months.</p>
<p>Discussions around seriously difficult and poorly understood subjects are being turned into the equivalent of celebrity snapshots. This type of commentary is just noise.</p>
<p>Looking underneath the noise, we need to understand that “growth” isn’t equivalently “good” for everyone. This is clearest in the US, which has the best “growth” record of any of the advanced economies. There we see, along with growth of the aggregate economy, a systematic redistribution of income and wealth towards a small part of the population. </p>
<p>This is explained by global work redistribution and, increasingly, by technology that is <a href="http://opinionator.blogs.nytimes.com/2013/08/24/how-technology-wrecks-the-middle-class/">displacing middle class workers with software and robots</a>. The US shows it is possible to manufacture and export more while not employing many more manufacturing workers. It is this kind of dissection of the sources and nature of growth, rather than talking about house price movements, which is essential to understanding the social implications of developments in the economy. </p>
<p>Instead the short-term and data-focused commentary we currently see across the media reinforces and perpetuates the notion that government policy can have a decisive impact on the nature and direction of future growth.</p>
<p>The reality is far different, for two reasons.</p>
<p>First, governments will always be behind rather than in front of trends, no matter how hard they try; the data simply isn’t good enough to accurately predict the future. Accepting this implies the need for more stable policies and some humility about what any policy might actually produce. </p>
<p>Second, no government, let alone one of a country of the size of the UK, can alter the fundamental trends in trade and technology we see developing around us. What governments can do, however, and should do, is help their citizens best adapt to what is happening in the world, especially via education and the fostering of greater understanding of global trends.</p>
<p>An important component of this is governments ensuring they keep updating the social safety net. This is vital because the speed of economic change is usually greater than the ability of many of the affected groups to adjust to it. The quite rapid shift of the UK economy away from manufacturing toward services, starting in the 1980s, is a good illustration of the consequences of neglecting to implement an effective social response.</p>
<p>If government really wants to help its citizens, its businesses and its industries adapt to the shifting global economic sands, it would do well to remember that instead of shaping those shifts, its job is to ensure we all adapt and succeed alongside them.</p><img src="https://counter.theconversation.com/content/22363/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>George Feiger does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>So the International Monetary Fund has revised its economic growth forecast for the UK upwards. It now expects 2.4% growth in the UK this year, up from the 1.9% they predicted a few months back. Cue celebratory…George Feiger, Executive Dean, Aston Business School, Aston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/132452013-04-10T20:41:39Z2013-04-10T20:41:39ZThe truth behind our ‘dangerous’ public debt levels<figure><img src="https://images.theconversation.com/files/22215/original/wdhcvvxx-1365477788.jpg?ixlib=rb-1.1.0&rect=16%2C70%2C950%2C820&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">While the Coalition has criticised Australia's public debt levels, it is the country's private debt that is the big issue.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Liberal MP Andrew Robb has criticised the rise in public debt under the current Gillard government in a recent <a href="http://mpegmedia.abc.net.au/newsradio/audio/20130404-robb.mp3">ABC radio interview</a>. During the interview, Robb claimed growth in public debt was excessive and unsustainable, and accused Treasurer Wayne Swan of improperly representing the government’s current position on the public debt.</p>
<p>That public debt may constitute a problem is a familiar refrain from the conservative side of politics and economics. Many no doubt remember Howard and Costello’s incessant criticisms of the Keating government’s management of public finances when they took power in 1996, blaming them for being bad economic managers. The Coalition government certainly hasn’t let Labor forget this.</p>
<p>When discussing public debt, it makes sense to compare it to the size of the economy, or GDP (Gross Domestic Product). Quoting absolute figures is not sufficient to understanding the scale of any debt (see here for a <a href="http://www.brisbanetimes.com.au/opinion/politics/cure-for-a-bloated-public-sector-20130404-2h9f8.html">bad example</a>). GDP represents the size of a country’s income, though, of course, governments can only commandeer a portion of that income through taxation. The following figure displays the commonwealth government’s debt since Federation.</p>
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<p>In its first decade, the government had no debt before piling it on to finance Australia’s involvement in World War I. The period 1914 to 1918 represented the largest growth period by far in federal government debt (the second largest occurred in 2009 to combat the effects of the Global Financial Crisis). Interestingly, debt decreased between 1931 and 1937 in absolute terms, certainly the incorrect policy response to an economic depression.</p>
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<a href="https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>The ratio jumped once more due to World War II, to a record peak of 104% in 1946. A combination of solid repayment and strong GDP growth resulted in the rapid fall of the ratio to a low of 7% in 1974. The ratio would’ve likely fallen even further if not for the mid-1970s recession, requiring the government to debt-spend. The same again occurred during the early 1980s recession.</p>
<p>During the late 1980s, a massive commercial property (land) bubble formed, primarily in Melbourne and Sydney. It burst in 1989 due to the rapid escalation of interest rates to a nominal 18%. The resulting recession forced the Keating government to engage in a spending spree in an attempt to reduce the high unemployment during the early 1990s. Commonwealth debt peaked at 21% in 1996.</p>
<p>Once the Coalition gained power, again a combination of debt repayment and strong GDP growth saw the ratio fall to the lowest point on record, to 5% in 2007 (the Rudd government managed to lower it by a tiny fraction in 2008). Since the onset of the GFC, however, public debt expanded again under the Rudd and Gillard governments, to 16% in 2012.</p>
<p>A better measure of public debt is net rather than gross debt. The federal government doesn’t have liabilities alone; it also owns the debts of others. Subtracting this debt from the government’s shows net debt, which is always smaller than gross debt.</p>
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<p>An even better indicator of the government’s debt position is its ability to service the debt - the net interest repayment burden - again expressed as a percentage of GDP. The gross or net debt to GDP ratio is not a perfect reflection of the government’s ability to finance its debt due to changes in interest rates at different times.</p>
<p>The following figure shows the net interest repayment burden peaked at 1.7% of GDP in 1987 and 1996, even though the gross and net debt to GDP ratios were higher in 1996 than 1987. The difference is due to higher interest rates during the 1980s.</p>
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<p>What matters for countries with high levels of government debt is how high the net interest repayment burden is. This separates the US and Japan – countries with a relatively high level of government debt – from the basket-case PIIGS nations (Portugal, Italy, Ireland, Greece and Spain).</p>
<p>The federal government is currently in an excellent financial position. Even if the gross and net debt to GDP ratios were to rise, this does not necessarily translate into higher net interest repayments if the RBA further cuts interest rates from already historical lows and purchases government bonds. The federal government has one of the <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook43p/nationaldebt">lowest debt burdens</a> in the world.</p>
<p>Similar trends to the federal government public debt to GDP ratio is found in aggregate state and local government debt. From the 1850s through to 1890, colonial governments used debt to finance the construction of infrastructure. Tax revenue comprised a paltry amount of public finance (from 2% to 5% of GDP).</p>
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<p>The surge in the ratio from 1890 onwards was not so much due to state and local government spending to offset the effects of the depression, but rather due to falling GDP. For Australia, this depression was economically worse than that of the <a href="http://www.rba.gov.au/publications/rdp/1999/pdf/rdp1999-06.pdf">Great Depression</a> of the 1930s. A similar spike occurred during the 1930s.</p>
<p>Unfortunately, data on aggregate state and local governments were not continued after 1982 in the sources used to compose the figures. Parliamentary Library <a href="http://www.aph.gov.au/binaries/library/pubs/bn/eco/grossandnetdebt.pdf">analysis provides</a> some data on current state and territory net debt, again showing the debt burden is certainly not onerous. Gross foreign public debt <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/MSB/65">sits comfortably</a> at 20.7% of GDP.</p>
<p>Currently, public debt at all levels of government is tiny by historical standards and is certainly sustainable. The fashionable idea often repeated these days that rising public debt poses a risk to the economy has little substance in reality. Compared to the pre-WWII era, governments of today are a picture of fiscal responsibility and prudence, with the rise in taxation revenue helping to offset the need for using debt.</p>
<p>The real debt problem Robb has ignored is the colossal levels of debt that now saturates every part of the private sector. Private debt as a proportion of GDP is overwhelmingly larger than public debt. Personal debt is 9%, mortgage debt at 84%, and non-financial business debt is at 50%, for a total of 143%. A McKinsey and Co report estimates the <a href="http://www.mckinsey.com/insights/global_capital_markets/uneven_progress_on_the_path_to_growth">non-banking financial sector</a> debt at 91%.</p>
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<p>Private debt is different to public debt. The historic record shows it is often used to speculate on assets prices, typically stocks and real estate, creating one bubble after another. Both the 1890s and 1930s depressions were caused by bursting commercial property bubbles, reflected in the sharp rise in the business debt to GDP ratios in the decade before both depressions.</p>
<p>A primary cause of the mid-1970s, early 1980s and early 1990s recessions were the bursting of smaller commercial and residential bubbles, financed by rising business and mortgage debt. The total private debt to GDP ratio reached a historical high of 158% in 2008, on an immense rise in household debt (mostly mortgage debt), driving the <a href="http://www.macrobusiness.com.au/2013/02/the-history-of-australian-property-values/">largest housing bubble</a> on record.</p>
<p>Australia’s history shows increases in the public debt to GDP ratio have two causes: World Wars (1914-18 and 1939-45) and responses to economic downturns caused by private debt-financed speculation: the 1890s, 1930s, mid-1970s, early 1980s, early 1990s and the GFC in 2008.</p>
<p>An interesting point to note is the Coalition’s criticism of the rise in public debt that occurred under the Labor governments during the early 1990s and today. If the positions were reversed, we are supposed to believe Coalition governments would sit on their hands during a recession and GFC while unemployment and underutilisation increases, risking votes and consequently their power. In this scenario, Labor would then be denouncing the Coalition for being bad economic managers.</p>
<p>Economist Stephen Koukoulas has noted almost <a href="http://www.marketeconomics.com.au/2024-labor-or-liberal-government-debt">$40 of the $96 billion</a> in debt inherited by the Coalition in 1996 was a leftover from the Fraser government in the early 1980s, when John Howard was treasurer. The recession during this period necessitated an expansion of government debt, though it was hypocritical for the Howard government to criticise Labor for its expansion of public debt when the Coalition acted no differently during an economic downturn.</p>
<p>That public debt has risen once again by a small margin since the onset of the GFC is not sufficient grounds to label it as excessive as Robb has. Thus, these criticisms over public debt have nothing to do with either political party being good or bad economic managers, but rather, is the result of cheap political point scoring, hoping the public doesn’t do its research. </p>
<p>Ultimately, the focus of concern should not be upon the government’s historically and internationally low position of public debt, but upon the immense burden imposed upon the Australian economy by private debt. Once the housing bubble begins to deflate and citizens reduce consumption to focus on debt repayment, the federal and state governments will have no choice but to go deeply into debt to ameliorate falling taxation revenue and higher unemployment.</p>
<p>There is no intrinsic problem with either public or private debt. Both need to be carefully considered to ensure efficient allocations into productive activity. Public debt is not a burden if it is used to produce an income stream to pay down the resulting interest or to enhance productivity, for instance, if invested in infrastructure, health, education, or research. It becomes a problem, however, if used to finance excessive defence spending, bank bailouts, pork-barrel projects and middle-class welfare.</p>
<p>The same goes for private debt. As long as debt finances production, the resulting income streams will be more than enough to pay down the debt. On the other hand, if private debt is used to speculate on stocks and real estate - as has occurred many times in the past - it simply results in a zero-sum game where speculators transfer assets among themselves without enhancing productivity.</p>
<p>Unfortunately, the discourse over debt is almost entirely focused upon public rather than private debt. There is no reason for concern over our relatively low federal or state debt. The real problem is in the major rise in the private debt, primarily within households. This is what commentators should be focusing upon.</p><img src="https://counter.theconversation.com/content/13245/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Philip Soos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Liberal MP Andrew Robb has criticised the rise in public debt under the current Gillard government in a recent ABC radio interview. During the interview, Robb claimed growth in public debt was excessive…Philip Soos, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/94012012-09-19T01:51:53Z2012-09-19T01:51:53ZTo awaken its dormant economy, Japan must confront an age-old problem<figure><img src="https://images.theconversation.com/files/15172/original/sz5v6zfy-1346982990.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Societal ageing is causing Japan's GDP growth rate to lag.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Japan might be the third largest economy in the world, but the past 20 years have seen its GDP growth rate fall behind that of its economic rivals, the US and UK. </p>
<p>The outlook appears bleak. Recently, Japan <a href="http://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&sqi=2&ved=0CEIQFjAG&url=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F98fd954a-faf6-11e1-93da-00144feabdc0.html%3Fftcamp%3Dpublished_links%252Frss%252Fmarkets_currencies%252Ffeed%252F%252Fproduct&ei=7CJZUPTXB8nqmAWZ5oDQAw&usg=AFQjCNHqLo0oPfVzdtroLMCW7TMfwqTTAw">halved its second-quarter growth estimate</a>, raising fears of a recession. Morever, Japan’s exporters could face more pressure after the US Federal Reserve announced a <a href="https://theconversation.com/bringing-out-the-big-guns-bernanke-unleashes-qe3-9584">third round of quantitative easing</a>, which could drive down the US dollar against the yen. </p>
<p>Pressure to deal with the country’s darkening economic outlook has fallen to the Japanese government (whose deficit financing bill <a href="http://www.reuters.com/article/2012/08/31/us-japan-economy-budget-idUSBRE87U04H20120831">probably won’t make it</a> through the opposition-ruled upper house). </p>
<p>Meanwhile, Japan’s central bank has <a href="http://www.yomiuri.co.jp/dy/business/T120906004369.htm">vowed to maintain</a> its monetary easing policy.</p>
<p>Ippei Fujiwara from the Australian National University examines the long-term economic health of the nation and suggests societal ageing and a lack of technological growth could be to blame for the country’s falling GDP growth rate.</p>
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<p><strong>Japan is currently the third largest economy in the world, yet you call the last two decades in Japan’s economic history the “lost decades”. Why?</strong></p>
<p>If we compare the path of Japan’s per capita GDP to that of the US or the UK or France, we can see Japan reached almost the equivalent level of the US and the aforementioned countries around 1990. Before that, GDP growth rate was around 9.4% until 1970 and 3.4% until 1980. Catch-up to these countries ended around 1990. Japan’s lost two decades should not be recognised as the drop of GDP growth rate by 3% after 1990. Rather, the issue is why per capita GDP growth after the catching up has been relatively lower than other advanced economies. After 2000, Japan’s per capita GDP growth rate was under 0.9%, while other major countries on average were 1.4-1.5%. The problem to be investigated is a milder one: why the per capita GDP growth rate has been lower by about 0.5% than in other advanced economies.</p>
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<p><strong>How do you explain the falling GDP growth rate?</strong></p>
<p>Japan’s growth rate is not the highest per capita, but if you compare Japan’s GDP growth rate to the working age population, surprisingly Japan’s growth rate is higher than that of any other industrialised economy in 2000-2010. Production should be constrained by the working age population. This means we can explain falling GDP growth rate by examining societal ageing.</p>
<p>Interestingly, there also appears to be a link between land price and the working population, which is explained by this inverse dependency ratio graph where the pink line is real land price and the black line is the working age population.</p>
<p>The peaks, as you can see, tend to correspond.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/15170/original/kdfyrd4k-1346982057.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/15170/original/kdfyrd4k-1346982057.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=414&fit=crop&dpr=1 600w, https://images.theconversation.com/files/15170/original/kdfyrd4k-1346982057.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=414&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/15170/original/kdfyrd4k-1346982057.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=414&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/15170/original/kdfyrd4k-1346982057.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=521&fit=crop&dpr=1 754w, https://images.theconversation.com/files/15170/original/kdfyrd4k-1346982057.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=521&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/15170/original/kdfyrd4k-1346982057.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=521&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Ageing population and property prices: Japan.</span>
<span class="attribution"><span class="source">Bank for International Settlements working paper</span></span>
</figcaption>
</figure>
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<p><strong>Where should Japan look to maintain its economic status?</strong></p>
<p>The distinction between the GDP and GNP is important in an ageing society. While GDP is gross domestic product, GNP refers to gross national product and includes international income from abroad. Japan has the biggest net foreign asset base in the world. It sends a lot overseas — more than it purchases. Theoretically, if you are exporting more, you have greater foreign currency. The way to make profit is then to keep foreign earnings overseas, which means you can get interest repayments. That’s the basic idea of this concept, and Japan has been receiving positive financial income from this. As per capita GDP falls with societal ageing, it’s becoming more important for Japan to maintain GNP to in turn maintain living standards.</p>
<p>But recent studies show that the interest Japan earns from net foreign assets is, in actuality, very small – Japan appears to be inefficient in its investments. This is certainly a place in which Japan needs to improve. At the same time, there’s a huge demand for [technological] industry in terms of supporting the ageing population with innovative goods and devices. If we can create new goods and services for elderly people, Japan can be the leading country in the “greyer” world. This will result in an increase in the productivity and therefore raise not only GDP but also living standards.</p>
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<p><strong>The Bank of Japan has announced a 1% inflation target in an attempt to increase consumer demand. What role has its policy played over the last 20 years in establishing the current economic climate?</strong></p>
<p>People tend to blame the BOJ for not making inflation expectation high enough, especially compared to the United States where, even after the <a href="http://www.time.com/time/business/article/0,8599,1923197,00.html">Lehman crisis</a>, inflation expectation was kept around 2%. In Japan, inflation expectation can often be negative because the current inflation rate is negative. There’s the argument that should the Bank of Japan have reduced nominal interest rates in the 1990s, then we could have avoided deflation. This ignores the idea that monetary policy is always implemented in periods of uncertainty. In fact, my research shows that optimum monetary policy undertaken in this period of uncertainty was not far off what had already been conducted in Japan.</p>
<p>The <a href="http://www.nytimes.com/2005/12/25/business/yourmoney/25japan.html?pagewanted=all">asset bubble of the 1980s</a> is similar in that people often talk about the need of the central bank to do something. But from the point of view of the standard theory, asset prices were growing thanks to technological progress. Under such circumstances, tightening monetary conditions is like tightening demand, so in this situation you are increasing production capacity but reducing demand. It is not still clear whether central bank can act preemptively to avoid bubble under uncertainty.</p><img src="https://counter.theconversation.com/content/9401/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ippei Fujiwara does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Japan might be the third largest economy in the world, but the past 20 years have seen its GDP growth rate fall behind that of its economic rivals, the US and UK. The outlook appears bleak. Recently, Japan…Ippei Fujiwara, Associate Professor, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.