From 1933 to 2008, there was no major global recession with a great intensity or duration. Cristina Romer, advisor of President Obama, wrote several articles about this fact: no depression in 75 years, a golden period (except for the wars). In particular, since 1991 there was no recession at all in the USA (negative growth) – 17 years. After 1929-1933, for very few times the EUA has shown two or three successive years with negative growth (and such negative numbers were always reasonably low): 1945-1947, 1974-1975, 1980-1982.
Taking Brazil for comparison, the economic situation was even better. The recession of 1930-33 was modest and there never was a period of two successive years of negative growth since then. As far as intensity is concerned, Brazil had really two complicated years with 4% declines: 1981 e 1990.
This amazingly low variability of real GDP both in the USA and in Brazil in the last 75 years suggest that we could use the output gap analytical framework” for both countries. This requires of course considering potential output and long-term trends, where Brazil has a small advantage over the USA for the 75 period as a whole, even though the Brazilian dynamics was more intense between 1933 and 1980 (for almost 50 years), while the USA really accelerated potential output due to productivity gains in the last 25 years since Reagan/Clinton.
One can state that the welfare of any society is directly associated with low inflation and low GDP variability (low intensity and low duration). As a matter of fact, the concepts of unemployment and output gap are basically similar considering Arthur Okun’s Law (1964). However, Central Banks believe that they cannot control both macroeconomic variables at the same time due to lack of instruments as well as economic policy dilemmas.
The Brazilian Central Bank is like the Bundesbank: they only worry about inflation and that’s it. The Federal Reserve reverted entirely his position since the beginning of 2008, forgot about inflation targeting models and now is only worried (with good reason) about GDP variability ( intensity and duration of the output gap), even ignoring future inflationary risks.
Given that, Brazil continues to maintain very high interest rates (although on a declining trend) against zero in the USA. And also on the side of monetary aggregates, there are major differences of policy: monetary base in the USA has tripled in 12 months in order to compensate for declines in the money multiplier and particularly credit multiplier.
We are highly confident – given such historical and theoretical considerations – that the present global recession is going to end in 2010. It is true that, for statistical reasons, the 2010 figure may be negative in both countries due to a certain “carry-over” from 2009.
But the second half of 2010 will be characterized by recovery, with real GDP beginning to approach potential GDP (with a consequent decline in unemployment/output gap) or at least maintaining a constant gap. Anyway, positive growth will be back even if only sufficient to keep the rate of unemployment constant.
Even economists like Nouriel Roubini – who have been pessimists since 2007 – gave some positive signs in the last few days. Roubini said: “The rate of economic contraction will slow from the -6% of Q1 to a figure closer to -2%, and next year the economic recovery will be so weak – growth below 1% and unemployment rate peaking at 10% – that it will still feel like a recession even if we may be technically out of it. So, compared to the bullish consensus that sees positive growth at 2% by Q3-Q4 of this year and return to potential growth by 2010, my views are still consistently more bearish than the consensus.”
And also: “The rate of economic contraction will slow down towards -2% for the US and other advanced economies by year end. That is only a mild improvement and still a severe U-shaped recession with a very weak and tentative recovery by 2010.”
It is important to take into consideration that an increase in unemployment (or output gap) as dramatic as in 2008/2009 did not occur since 1991 in the USA and since 1990 in Brazil. At this point, market forces and greediness begin to act – the basis of capitalism – and with some help from good economic policy responses (money, credit and hopefully exchange rate policies), they begin to operate to bring back the growth of real GDP in the direction of the growth of potential output – or at least to two basically equal growth rates (like Roubini says).
This means of course two different and positive hypotheses: during a certain period of time (2010/2011) real GDP will grow more than potential GDP in order to reduce unemployment – or at least equal to potential.
That is: assuming that the potential output in the USA grows at 3% per year and in Brazil at 5% per year, it is perfectly natural to have one year from now these two countries growing again between 3 and 5% per year.