We haven’t heard much from the former Maverecon blogger since he moved to Citigroup to take up the role of chief economist.
But that changed on Thursday morning.
In Citi’s Global Economic Outlook and Strategy note, Willem Buiter, staying true to his academic roots, has penned a 16-page essay complete with a long list of references. The essay lays out his expectations for the US, eurozone and Chinese economies over the next couple of years.
He’s lowered his GDP forecasts for the eurozone, revised his 2012 estimate for the US and says the UK lies somewhere between the two, with the risks to the downside, of course:
Our global forecast is reasonably positive. Overall global real GDP growth is expected to be 3.5% in 2010 and 3.3% in 2011 (at market exchange rates). Emerging market growth is seen as buoyant and vigorous at 6.3% in 2010 and 6.0% in 2011. Expectations of growth in the US have been revised upwards for the current year to 3.2%, but down to 2.8% in 2011. For the Euro Area we project an even less robust recovery than we did a month ago, with growth rates for 2010 and 2011 of 1.1% and 1.3% respectively. UK economic growth prospects are somewhere between those in the Euro Area and the US, but with the balance of risks firmly on the downside, in view of the country’s fiscalfinancial vulnerability.
And Buiter is far from confident in those estimates:
Not only are the growth rates we forecast uncertain (with confidence intervals widening as we move further into the future), they are also contingent on worldwide economic and financial policies. In what follows we spell out some of the key decisions facing policy makers in three important countries or regions: the US, China and other key emerging markets, and the EU/euro area. The uncertainty about the choices that will be made by these policy makers is an important driver of the uncertainty surrounding our forecasts of GDP and other key economic and financial variables.
Nowhere more so than in China:
China’s contribution to a sustained global recovery likely requires policy changes and key relative price changes that are mostly in the opposite direction from those in the US. We believe it needs to reduce the national saving rate and shift resources from the tradable sectors (exporting and importcompeting) towards the production of non-traded goods and services. Maintaining its historical focus on capital-intensive export-led growth would likely, with the Chinese economy steadily increasing in size, cause the Chinese terms of trade to worsen steadily and materially, with the price of exported manufactures declining relative to the prices of Chinese imports, especially of raw materials and luxury consumer goods and services. It could also increase international trade tensions, especially with the growth performance of China and other key emerging markets outstripping that of the EU, the US and Japan.
The traditional Chinese growth model of export-driven, capital-intensive, energy-intensive and commodity-hungry production and depressed levels of private and public consumption is unlikely to be environmentally sustainable. The first constraints to bind are unlikely to be the global environmental externalities from Chinese growth, such as global warming and other forms of climate change. Instead local, regional and national environmental constraints are likely to limit China’s future growth if the country persists with its traditional strategy (see e.g. Economy (2007) and Zissis and Bajoria (2008)). Fresh water pollution and under-pricing of water are producing growing shortages of this vital commodity. Air pollution is creating public health and social problems in most urban and industrial areas. Soil pollution, degradation and erosion, including desertification, are a growing economic, social and political problem.
As for the eurozone:
Even though the overall fiscal position of the euro area is considerably stronger than that of the US, the UK and Japan (see Figure 7), the euro area is also home to a handful of individual nation states whose fiscal balances are in such poisitions that the markets have begun to question the creditworthiness of their sovereigns, as shown by the CDS spreads and the spreads of their 10-year sovereign debts over Bunds. Greece, Portugal, Spain and Ireland are on the usual list of fiscal suspects, with Italy also making an occasional appearance.
In the negotiations between the potential ‘donor countries’ (those considering extending conditional financial support) and the ‘recipient country’ (the country facing a fiscal solvency gap that cannot be resolved, given the internal political equilibrium, without external financial support and externally enforced conditionality), there is a small chance of a failure of political will. There is also a small risk of an equally dangerous inability of the bargaining parties to correctly identify each others’ breaking points.
The ‘breaking points’ of the recipient country (or countries) is defined as the largest tax increases and spending cuts that can be imposed without a political collapse in the recipient country. The ‘breaking points’ of the donor countries is defined as the smallest tax increases and spending cuts that can be imposed on the recipient country that still makes the programme politically acceptable in the donor countries. We assume that the maximum amount of Greek fiscal tightening that is politically feasible in Greece exceeds the minimum amount of Greek fiscal policy tightening that is acceptable to the donor countries, otherwise a default is unavoidable.
The most likely outcome is that, despite some brinkmanship, a Greek default, or indeed any other sovereign default, will be avoided through a coordinated financial support programme with tough, painful fiscal conditionality, put together by the European Commission (EC) and the Euro Area (EA) member states (or the EU) with the technical support of the IMF. That, after all, is the way the fiscal crises in three EU member states that are not in the euro area — Hungary, Latvia and Romania — have been managed.
The rest in the usual place.
Related link:
Πάντα ῥεῖ - Willem Buiter’s Maverecon