It’s unwise to hear the ghosts of history in just one or two echoes of the present.
Which is just an overwrought our way of saying that it’s important to search beyond Japan for past experiences we can use to enlighten the current US situation. Japan’s 1990s balance sheet recession appears similar to our own and its two lost decades of middling below-trend growth are a discouraging prospect. But any single analogy will have problems, and there’s no harm in widening the search.
In a new note, Goldman Sachs researchers do exactly that by looking at other countries that have experienced “serious stagnations” — not outright recessions, just many years of plodding GDP growth.*
Or to be more specific:
We define episodes of stagnation as long-lasting periods of sub-par GDP per capita growth that are not interrupted by either sharp contractions or a return to mean growth… We then define an episode of mild stagnation as one in which countries stay between an upper and lower bound for more than six years, and an episode of serious stagnation, our main focus here, as one that lasts more than 10 years. Sharp new recessions or significant recoveries are thus excluded from these definitions.
It’s a page ripped straight from the Reinhart-Rogoff playbook of global, historical macroeconomic data-mining, and Goldman managed to find 93 examples of such “Serious Stagnations” from the last 150 years. (They also used Reinhart-Rogoff data to complement their own.)
For posterity, here are the previous, erm, winners of the Greatest Stagnation contest:
The qualities of a Great Stagnation are about what you’d expect: low growth averaging about 0.5 per cent annually, low inflation, higher and stickier unemployment, house price corrections, low returns on riskier assets. Starting to sound familiar?
The natural question, of course, is how likely it is that the major developed economies are already in one. Well, we’re clearly on the right path, which will come as a surprise to precisely nobody who hasn’t been in a coma for the last three years.
What the prior cases say about whether we’ll continue on said path is much less certain, but the odds have increased substantially (emphasis ours):
Defining the preconditions of stagnation across history is limited by the kinds of data that are available. But a lot can still be said. Our first approach is to match the relative frequency of stagnation episodes and periods of crisis. Our menu of crises depends on data availability, but it is sufficiently rich to give helpful answers. Chart 4 shows that stagnation periods tend to be either preceded or coincident with stock-market crashes more than 50% of the time. They are also related to currency crises and to a lesser extent to banking crises. The correlation with macroeconomic disasters (defined as 10% cumulative contractions in GDP per capita) is lower, and the connection to inflation crises or war is weak. The main signal we extract from this exercise is that market crashes, precisely of the type observed during 2008-2009, are highly informative about the prospects of economic stagnation.
To look at these factors together more formally, we have estimated a probability model that allows us also to generate forecasts… These models largely confirm the intuition from the simpler exercise. Stock-market crashes, currency crises, external debt crises and preceding periods of bad growth tend to raise the probability, and probabilities of stagnation are also higher in general for richer countries. That general story is consistent with—though broader than—the work we have done showing that growth recoveries are generally weaker than normal after major housing and banking busts.
We can use these results to see what the model says about the probabilities that a given country has entered or will enter a period of stagnation now. Chart 5 presents the results from our probability model applied to stagnation periods lasting for at least 8 years. While the differences between individual countries and the exact rankings should not be leaned on too heavily, overall the results are striking. In particular, the chances that EM economies will stagnate are much lower than for DMs. For example, all the BRICs are in the lower ranges of our probability estimates, with China, Russia and India at the bottom of the list. In contrast, developed economies populate the right-hand side of the scale, with probabilities in Europe and the US of around 40%. While this suggests that a long period of stagnation is far from a certainty, these probabilities are uncomfortably high relative to normal experience.
These factors are often more coincident than causal, and the ultimate outcome will obviously be determined partially by policy decisions that haven’t been made — and therefore the model isn’t really predictive. But that’s partially Goldman’s point: given the elevated dangers of a stagnant decade, what’s needed are growth-jolting policies.
An interesting note, and you’ll find the whole thing in the usual place.
* Quick note to avoid confusion: Goldman’s use of the term Great Stagnation differs from the way it is used by Tyler Cowen, who wrote a popular ebook called The Great Stagnation. Cowen’s ebook is about the productivity slowdown in the US and the failure of median incomes to grow as quickly as they had before 1973.
Related links:
Euro area recession likely to begin in Q4 - FT Alphaville
Against Japan-ification – FT Alphaville