For the better part of the past four years, I’ve been tracking the way the world’s leading industrialized economies have performed since the 2008-09 global crisis through a chart which shows real GDP relative to their pre-crisis level. The beauty of this chart is that it shows the post-crisis recovery as a sort of race between the various economies as they struggle to regain the lost output from the crash. For those who find reading Excel charts to be akin to reading a manuscript in Aramaic or Swahili, allow me to explain. The chart takes the peak pre-crisis level of real GDP as “100” and tracks quarter-on-quarter growth from there. So the first data point (“100”) for each country is the quarter before the crisis when real GDP peaked, this being Q1 2008 for most (Q4 2007 for the US where the crisis began, and Q2 2008 for Spain whose crisis began later). As you can see, the paths of these countries have diverged considerably since bottoming out during the 2008-09 crash. Some of the hardest-hit countries at the beginning like Germany and Japan are doing better, while some of the lesser affected ones, like Spain, now appear to be on a death spiral with no end in sight.
It doesn’t pay to be frugal
Perhaps the first obvious conclusion from this chart is just how bad the Eurozone is doing, and how the continent’s on-going crisis is dragging down even its star performer, Germany. Germany, until quite recently (Q2 2012), had been the best performing among the “trillion-dollar” economies and along with the US, the only to have managed to exceed its pre-crisis output. But it just goes to show how even a hyper-productive economy like Germany’s will feel the pinch if its trading partners get mired in recession which is what has been happening over the past year. This further makes the case that even if bailing out the continent’s basket cases may not be “morally” right from the frugal Germanic perspective, it makes perfect economic sense in order to keep your own economy from sinking in the same ship.
As a result, Germany has since been overtaken by the US, a country that despite its ups and downs, has seen a more sustained recovery than most of its industrialized peers, notwithstanding its severe unemployment crisis and its mind-numbing level of political dysfunctionality. Part of this growth, of course, is due to more favourable demographics compared to Europe and Japan, but still, the US has been less averse to undertaking stimulative measures as opposed to the hard-line austerity which has characterized most European economies. All in all, there at least appears to be a light at the end of the US tunnel even though I am quite sceptical that the economy will ever return to the “good old days” (dot-com or subprime housing bubbles notwithstanding) any time soon, if not ever.
A lost decade for the Eurozone?
But back to Europe, the outlook looks dismal. Aside from Germany and its recent snag, the French recovery has completely sputtered out since early 2011 after a promising start. In fact, GDP is now at its lowest since Q4 2010, something that amounts to essentially two lost years of output. And sure, the French may be on the right side of the austerity vs. growth debate, but there appears little that the government can do to really prop things up in the short term, given the country’s notorious resistance to structural reform. After all, a country which doesn’t seem to think a 10% unemployment rate is that big a deal (I know a few French people who “insist” the US and UK have an unemployment problem, not them) and who is willing to sacrifice a landmark free trade deal with the US in order to defend its multi-billion-euro film industry has some serious economic soul-searching to do.
As for the rest of the Eurozone, the chart says it all. Both Italy and Spain have been contracting relentlessly since the autumn of 2011 when the Euro debt crisis exploded to engulf more than just Greece. Output in these two countries now a staggering 8.5% below-peak in Italy and 7% below-peak in Spain with at least another one-two percentage points left before (hopefully) bottoming out. This is, in the most graphic terms imaginable, what an “internal devaluation” looks like, one in which the country must adjust to their new realities through falling wages and falling output before reaching a new competitive equilibrium. Countries not bound to the euro, like Britain, have had no need to undertake such self-inflicted suffering, and yet the Tory government has done just that in the name of a Thatcher-style rolling back of the state. It is true that compared to most European economies, Britain has not done that bad, but still, one can only imagine how much better things would have been if the government had been less radical in its austerity agenda given the enormous benefits that the country has in having its own currency.
Japan is getting it right (for now)
And lastly, there’s Japan. After two decades of stagnation, it’s quite interesting to see how the former sick man of Asia is actually doing not too shabby at all. This despite not only suffering the steepest recession among the G7, but by a devastating earthquake/tsunami/nuclear meltdown which has to easily rank as one of the worst natural disasters to ever hit an industrialized economy. Yet the country has bounced back, and is now on the verge of catching up with France (it’ll probably do so next quarter). “Abenomics”, a series of highly stimulative fiscal and monetary measures, appear to be the main reason why the country has done so well these past two quarters, proof again that a country that dares to bring out its big bazookas in times of crisis will reap the benefits of faster growth. Did I mention that Japan’s debt-to-GDP ratio is over 200%? That its fiscal deficit is likely to swell to double digits in 2013? But it doesn’t matter. It’s growing. And that, in the long run, is the best way to beat debt.
Europe should pay heed.
Side note: Wonder how Latin America is doing in comparison? Here’s the same chart with Brazil and Mexico included. Brazil’s GDP is now over 10% above its pre-crisis peak, and Mexico’s is nearly 8% higher notwithstanding having suffered the worst recession in the western hemisphere.