Gavyn Davies Financial Times blog is one of the world's most important because its focus is not only individual issues but on constantly seeking to assess the overall state of the global economy. The title of his latest piece 'Great Recession and Not-So-Great Recovery' is self-explanatory.
The focus of this article is on: 'a dangerous schism between the improvements in financial confidence and the marked lack of improvement in global GDP growth.' It notes: 'An abnormally deep recession in 2008/09 has been followed by an abnormally weak recovery, so real GDP per capita is now 10 per cent below the levels indicated by previous cycles.'
The article goes on to pose the following question: 'if global fiscal policy is tightening and the European banking sector is still in deep trouble, can a continuation of balance sheet expansion by the central banks produce a stronger recovery? The IMF and its economists seem to be answering “yes” to this question, since they are forecasting much stronger global growth in 2014 and 2015.'
The answer given is that: 'But there must surely be severe doubts about this conclusion. Both the IMF and the major central banks are becoming concerned that quantitative easing is causing excessive risk taking in some financial assets, and it is doubtful whether the beneficial effect on the wider economy, via price expectations and aggregate demand, is as powerful as it was at the start.'
These points are indeed correct but they can be focused further by analyzing what remains the core of the problem of depressed recovery in the developed economies, the severe fall and continued weak state of fixed investment. This is illustrated clearly in Figure 1, which shows the changes in components of GDP in the OECD (i.e. advanced) economies as a whole since the peak of the last business cycle in the 1st quarter of 2008.
In constant price dollar PPPs, the form in which the OECD publishes the statistics, OECD GDP in the 4th quarter of 2012, the latest available data, was $625bn above its level in the 1st quarter of 2008. Government expenditure was $326bn above its 4th quarter 2008 level, net exports $482bn above, and personal consumption $659bn above. However fixed investment was $700bn below its 4th quarter 2008 level.
It is therefore clearly the depression of fixed investment that remains the key weakness in the advanced economies.
The trend can also be seen clearly in Figure 2, which shows the quarterly percentage change in the domestic components of GDP in each quarter between the 1st quarter of 2008 and the 4th quarter of 2012. Personal consumption continues to recover - being 2.8% above its 1st quarter 2008 level. Government consumption is 5.0% above its 1st quarter 2008 level – although this has essentially remained static since 2010, and is now mildly falling, reflecting various austerity policies. The key problem is that fixed investment remains –8.8% down.
A necessary consequence, of course, is that fixed investment has fallen as a percentage of GDP continuing a long term trend in advanced economies. Fixed investment, which in the 1970s was slightly under 25% of OECD GDP, by the eve of the financial crisis had slipped to slightly above 21% – i.e by approximately 3% of GDP. On the latest data it had declined by approximately a further 3% of GDP to 18.4%.
Since the 1970s fixed investment has therefore fallen by around 6% of GDP, with half of this fall occurring prior to the international financial crisis and half since it commenced – Figure 3.
It is, therefore, clear that it is the fall in fixed investment which primarily accounts for the ‘Not So-Great Recovery’. As fixed investment is also the primary source of GDP growth in advanced economies, in growth accounting terms constituting around 50% of economic growth, this sharp decline also therefore underlies the long term growth deceleration in the developed economies.
The superior response to the financial crisis of China, which has focussed on an investment side stimulus programmes, thereby preventing any decline in fixed investment, is evident from such data.