Recovery May Be Sharper than Most Expect: Mussa

The economic recovery may be sharper than many forecasters, including the International Monetary Fund, have predicted, precisely because the recession was so deep, Michael Mussa, senior fellow, Peterson Institute for International Economics, told

"My observation is that when you have a deep recession you usually get a steep recovery," Mussa, who was also chief economist and director of the Department of Research at the IMF, said in a telephone interview. "What I'm forecasting is not a recovery that exceeds what we've seen in the past coming out of recessions."

World economic output will fall a little more than 1 percent this year and is likely to rise by slightly more than 4 percent next year, he said. Advanced economies should fall by around 3.3 percent in 2009 and rise by 3.3 percent in 2010.

The fall in US output may reach about 2.4 percent this year, but next year the world's largest economy is likely to post a strong rebound of around 4 percent, Mussa said.

The IMF prediction, updated in July, puts the fall in world economic output at 1.4 percent this year and it expects a meager recovery of 2.5 percent next year. Advanced economies are predicted to decline by 3.8 percent in 2009 and rebound by a modest 0.6 percent next year.

According to the IMF forecast, the US economy will fall by 2.6 percent this year and rise by only 0.8 percent in 2010.

But Mussa said his forecast, which assumes that consumers will want to increase their savings rate, takes into account historical trends.

Investment Picking Up

Over six quarters, from the second half of this year to the end of next year, US gross domestic product is likely to increase by 7 percent, while historically the average growth in GDP in the 6 quarters after a recession was 10 percent, Mussa said.

"I'm expecting business investment in equipment and software to pick up," he said.

Sharon Lorimer

Residential investment dropped 56 percent and is expected to recover at least one third, while business investment in equipment and software was down 25 percent during the recession, reaching a net value of about 0, and is expected to recover at least half, Mussa explained.

"There are obviously a lot of reasons to worry that (the recovery) won't be as strong. But there are also reasons to hope that it will be stronger," he said.

The hard-hit banking sector will rebound with the economy and will benefit from the fact that the recession wiped out a lot of the competition from non-bank provider of loans.

The first contraction in nominal GDP since 1954 is the main reason why credit demand has not picked up yet, Mussa said.

"Demand for credit has been shrinking rather than expanding… but I anticipate that once demand picks up, credit will expand," he added.

Markets Upbeat

A stronger rebound will also bring a less scary jobless rate, and his prediction regarding unemployment is also more optimistic.

"The unemployment rate will creep up a little bit more," probably reaching 10 percent this year, but it is likely to fall below 9 percent next year, he said.

For the euro zone, Mussa forecast a decline of 3.7 percent this year and a rebound of just 2.3 percent in 2010.

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Developing economies will fare better than advanced ones, with China topping the list of growth with 8.3 percent forecast for this year and 9 percent for next year. India is likely to grow by around 6.4 percent in 2009 and by 7.5 percent in 2010 and Brazil is likely to stagnate this year and rise by 3.6 percent next year.

Russia is likely to be the only BRIC country to post a decline this year, of a little over 4 percent, but next year it will grow by about 2.5 percent according to Mussa's forecasts.

Stock market performance is hard to predict because of the specific volatility but investors seem to be very upbeat about the world economy, he said.

"I would say the markets at present seem to be pricing at least the optimism of my forecast if not something more," Mussa added.