IMF study: Global slumps more common

By

Posted 8:54AM on Wednesday, April 10, 2002

WASHINGTON - Last year, when the United States led the world into a global economic slump, forecasters remarked at how unusual it was for the entire globe to be in the doldrums at the same time. A new study, however, says global slumps are much more common. Likewise, the fact that this downturn was led by a sharp drop in business investment is not all that unusual, according to the study released Tuesday by the International Monetary Fund. IMF economists looked at recessions in 21 industrial countries from 1973 through 2001, and in a smaller group of countries going all the way back to 1881, to try to find recurring patterns. The IMF's main conclusion was that synchronized downturns across a number of countries are the rule, not the exception. In fact, the last period of weakness - in which the United States suffered a recession in 1990-91, followed by downturns in Germany and Japan - was unusual. The IMF said the world is now closely tied together by the huge flow of trade among nations and by technology that links investment flows among nations. Trouble in a major stock market in one part of the world quickly shows up as turbulence in other countries. ``In the recent downturn, the bursting of the tech bubble was an international phenomenon,'' the IMF study said, referring to the steep drop in the stock market prices of many technology companies, not just on Wall Street but in stock markets in other nations. In previous downturns, the IMF said, common factors included a big jump in global oil prices and the simultaneous boosting of interest rates by central banks to battle inflation. The IMF review also found that the sharp drop in investment by businesses in new plants and equipment which occurred this time around has often been a precursor of recessions. ``The role of fixed investment in recessions has actually increased over time, with virtually all recessions in recent decades accompanied by contractions in fixed investment, compared with only about 60 percent of recessions in the late nineteenth century,'' the IMF concluded. Many economists have contended that the current slump in the United States was unusual because it was led by a drop in business investment rather than a falloff in consumer demand. But Kenneth Rogoff, chief economist at the IMF, said the IMF review of past downturns showed the current slump is not that unusual, either in the United States or in other countries. ``In many ways, this is more of a plain vanilla downturn than something that is unusual,'' Rogoff said. The IMF study said that the one country that did stand out was Japan, which has been hit with three recessions since 1993. Japan has also been hit with deflation, a period when prices are falling, which makes it harder for the traditional remedy of central bank interest cuts to lift the country out of a downturn. The IMF said Japan's decade-long bout of economic weakness ``resembles the experience of other countries with deep structural problems,'' such as Britain, Sweden and New Zealand in the 1970s. Many economists have contended that Japan will remain mired in problems until it moves more forcefully to deal with a massive level of bad debt being carried by Japanese banks. The IMF's study of recessions will be included in its semiannual World Economic Outlook report, which will be released next week in advance of the agency's spring meetings in Washington. Rogoff said the IMF decided to release some of the economic studies ahead of the WEO's economic forecast in an effort to draw more attention to them.