Not optimistic at all

Martin Wolf is one of the world’s most senior and most influential economic analysts. 23 years ago, he joined London’s Financial Times, and his column in the paper is one of the most widely read in economic journalism. In a recent special exclusive interview in China with "Globes", held alongside the World Economic Forum’s Annual Meeting of New Champions 2010 (Summer Davos), where he is a respected and consistent speaker, Wolf presented his forecast for the global economy. Two years after the low point of the crisis marked by the collapse of investment house Lehman Brothers, his forecast is not especially optimistic, to say the least.

Globes: Martin Wolf, will the scenario of a double dip play out? Are we on the way to another recession?

Wolf:" I do not know, and the problem is that no one knows. The second problem is that we don’t know how to forecast crises and recessions. In any case, we’re talking about a question that is relevant to the West, to the US, to Europe, and to Japan, because no one is even considering that China will not grow. What is important is the rate of growth.

"Let’s assume that the US economy will suffer a drop in output for two consecutive quarters, and after that growth will rise to 3% per quarter. Let's assume another case where there is no negative growth but that growth over the course of a decade is around 1%. It’s clear that the first case is preferable to the second. So what is important is the rate and type of growth."

So will we see a slowdown in the rate of growth?

"My estimate is that there is a very big chance that the rate of the growth in the US, Europe, and Japan will be below potential, demand will be very weak, unemployment will remain high, government deficits will be high, public debts will be very high, and there will be difficult problems on the macro-economic front. That’s the picture, in my opinion, for at least the next five years, and it is more important than the question of whether there will be another bottom."

Five years? So we are beginning the lost half-decade in the US and European economies?

"The output of all those economies will not return to the levels that we saw before the crisis. We’ve already lost three years. It is reasonable that we can expect another similar half-decade. The scenario is similar to what Japan experienced: low growth, high unemployment, deflationary pressures, interest rates on the floor, huge external debt. I already wrote this a while ago, but now it appears to me more realistic than ever."

So what do we do? Should the US government spill more money? Should they continue to increase their deficit and debt? Haven’t they already invested enough money already?

"What are the alternatives? Where will the growth come from? Look at demand. Private consumption will continue to be weak, because we are seeing a jump in the savings rate after the big loss of wealth during the crisis. Net exports, after deducting imports, will continue to be negative, and with a lot of luck will grow by half a percentage point at most. You can also assume that there won’t be a lot of houses built soon. More than that, I don’t see, and more than a few people don't agree with me, a serious push to invest by companies.

"So maybe firms will invest in IT, but this is a sector which is constantly becoming cheaper, and primarily comes from outside the US. There are no companies that are setting up new factories in the US. If they are building new factories, they are in developing economies. So what’s left? Public spending. It’s a tragedy, but there is no other alternative. What there is, is fiscal expansion and monetary expansion, meaning zero interest, which will continue."

So the salvation will come from the government?

"No. As I wrote two years ago, it was not enough, and still is not enough."

But you can’t waste forever. There is a deficit.

"Almost the entire government deficit in the US is the result of the recession and the collapse of financial institutions, not of the stimulus packages. That is, the deficit is mostly the result of the situation that was in the US before the crisis."

So much needs to be added?

"In my opinion, they should have invested double. The results were worse than I anticipated: despite the fact that output did in fact grow, but a bit, the employment level collapsed, and it is irreversible for now. Therefore they should have invested more than I thought."

So what will be?

"Therefore, it is difficult for me to believe that we’ll see more than a very weak recovery with high unemployment rates and very weak demand. By the way, deficits and debts will still be big, and if they would have invested more they would not have been much bigger and scarier. But if they would have invested more, they would have improved the private sector’s situation which would have generated growth, and that is what cuts and reduces the debt. It is impossible to cut debt or deficit without growth. There is no such thing."

If not the US, maybe consolation will come from somewhere else? But when Wolf is asked, he explains that the US is the key and it is difficult to see high growth in the world without the US in the picture. "The world still depends on American demand," he says. "And so the world will have a problem. I do not see healthy recovery because the American economic policy has gotten to a dead end. Everything is quite stuck."

So we’ll have to depend on developing economies India, China, and Brazil. Will that be enough to guarantee global economic growth?

"I believe that the growth in Asia’s economy will continue. There is tremendous supply there, and demand that is difficult to imagine. It is a real revolution. Will it be enough to lead growth in the whole world without Europe or the US? I don’t think so. We saw in 2009 that it is not enough. The Western world is still the biggest of them all. I definitely believe that the Asian upswing is a process that cannot be stopped, unless an unexpected event occurs, which in my experience always occurs."

What, for example?

"You can imagine what would happen if your country attacks Iran, for example."

Do you know something else about Israel, about Israel’s economy, besides the bad news?

"Yes. I know that it is doing amazingly. I heard the stories, and I have no reason not to believe. I know that in Israel, there is a very strong high-tech industry. I disagree with your Prime Minister, Netanyahu, on several issues, but I believe that he was a wonderful Minister of Finance. I understood that Israel’s economy has tremendous potential."