OECD Forecast 4.1% Eurozone Contraction For 2009

According to this Reuters report, the Slovenian Minister of European Affairs and Development Mitja Gaspari informed a news conference in Ljubljana yesterday (Thursday) that the latest OECD 2009 forecast for the eurozone is for a contraction of 4.1 percent. He also stated that the OECD figures show Germany’s economy will contract by 5.1 percent and Italy’s by 4.2 percent. While these figures are completely unofficial – official publication of the updated OECD forecast is due on March 31 – they do not seem at all unreasonable, although they are of course shocking. At think at this stage talk of a recovery in the second half of the year is completely premature, and the only real issue is whether 2010 will simply be more of the same, or will be a bit better (a eurozone contraction of say 2%).

The previous OECD forecast, issued on November 25, showed euro zone 2009 GDP down 0.6 percent, Germany down 0.8 percent and Italy down 1 percent. I think the current numbers are now in the right order of magnitude, and the debate will obviously be about what to expect for next year.

The IMF yesterday published an “update” eurozone forecast of a 3.2% 2009 contraction, but also reported it was still “working on its projections”.

Advanced economies will suffer deep recessions in 2009, the assessment said. Leading economies in the Group of Seven are expected to experience the sharpest contraction for these countries as a group in the post-war period by a significant margin (see table). The IMF said that in the fourth quarter of 2008 global GDP contracted by 5 percent at an annualized rate. The IMF is still working on its projections and will announce numbers for countries around the world on April 22.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

8 thoughts on “OECD Forecast 4.1% Eurozone Contraction For 2009

  1. Did the OECD foresee the 2007 and 2008 crisis? I don’t think so.

    The OECD is just able to extrapolate on recent economic data. When a downturn or an upturn happens, they are always wrong. In this time of great uncertainty, it could get a lot worse or a lot better in 2009.

    Of course, they need to put out a forecast to show that they are of some use. But they aren’t and it would be better for the minister of European affairs and development not to give some credibility to such a masquerade.

  2. Hello Michael,

    “Did the OECD foresee the 2007 and 2008 crisis? I don’t think so.”

    Well just for the avoidance of doubt. I did forsee the 2007 and 2008 crisis, and my numbers have been pretty much good so far.

    And I do I think the current 2009 OECD numbers “are now in the right order of magnitude” so following your reasoning I guess we should get ready for a 4% to 5% Eurozone contraction. My guess, for what it is worth, is that France won’t be that bad, 2% – 3%, I think, but I am not sufficiently focused on the details of the French economy to be sure. I am about to publish a short study on Italy today. Initially, though I am pretty much a bear on Italian growth, I was rather surprised by the size of their estimate, but looking more carefully, I think they are in the right ballpark. Spain and Germany both look set to have contractions of over 5% to me.

  3. In Finland, back in September they (Finance ministry)predicted a contraction of 0.5% to even a growth to 1% for 2009, as far i can remember. Two month after they reviewed it down to 1% contraction then 3 months after they started talking about a contraction of 4%.

    Now, this is worrying. Not because the economy is contracting but because they seem to absolutely have no clue about the state of the economy – local or global: this powerful impression that they have completely flawed models or economical analysis framework.

    Was it the Lehman “Butterfly” effect that throw all the models to the bin and took by surprise all the economist around the world?

    On the other hand, why the risk around the massive credit growth witnessed here in Finland and around the world was ignored? Do they really believe in Fairy tales.

    So finally, I prefer someone that make mistakes, acknowledge them and address them instead of having one that thinks he is in control and fool the consumers and try to push them toward a wall (as it happened in 1992 in Finland, and a scenario that could again repeat in 2010)

  4. Hi Hank,

    “this powerful impression that they have completely flawed models or economical analysis framework.”

    OK, OK. Point taken. My inetention here wasn’t to defend the OECD record here, but to say this is a working benchmark for 2009. This is important, since Europe’s leaders are still in denial, and cling to some ludicrous idea about recovery in H2 2009. So the issue isn’t “do you like the OECD” – but rather, “do you think this is realistic about 2009”?

    “and a scenario that could again repeat in 2010”

    Well, I quite agree. I think telling people simply to get themselves into more debt in this situation is very irresponsible. What we want is a new investment cycle to begin, but we are a long way from that, at present. Which is why I said:

    “the only real issue is whether 2010 will simply be more of the same, or will be a bit better (a eurozone contraction of say 2%)”

    I mean, my gut feeling is that 2010 will be more of the same, especially since there will be very little new stimulus money left, and debt deleveraging will still be going on, plus, here in Europe (and Japan) at least, we will probably have deflation to contend with, but I am not that sure about this, and I think we need to get into the second half of the year before we talk about 2010 outlooks, since visability is low at this point, and personally I think it is better to admit that.

    “So finally, I prefer someone that make mistakes, acknowledge them and address them”

    Quite, I 100% agree. In fact the most worrying thing is that no one, anywhere (as far as I know), has had the courage to come out, publicly, and in front of everyone, and apologise for getting everything so wrong to all those people who are set to lose their jobs and their homes. This suggests that we are a long, long way from “recovery”.

    “Was it the Lehman “Butterfly” effect that throw all the models to the bin and took by surprise all the economist around the world?”

    Well look, my view is that this is not the real issue. My view is that the models simply give insufficient weight to demographic processes. In that sense growth models since Solow are flawed, as are ideas of “convergence”. Personally, I see no convergence, unless it is towards ruin, but if you look carefully, for example, the Spanish and the German cases are very different (something you won’t find in the models). The only similarity is that in 2009 they are set to contract by 5% plus in each case.

    We need better models, but we need a lot more country level study. Of course, I don’t expect people to believe this simply because I say it, after all, does the sun go round the earth or the earth round the sun? It isn’t all that obvious just by going out into the street and taking a look.

    I think the only way of resolving such arguments is by testing, which is why I do give a certain importance to forecasts. But we do need to resolve them, since a lot about what the world will look like post 2020 depends on the answers we give to these questions.

  5. Again, a lot of analysis, no usable recommendations.

    What should be done? Should unemployment benefits be extended? Public works projects designed for make work?

  6. I’m personally worried about the nagligence of economists – at least in Hungary – regarding past mistakes and flawed concepts. Maybe it’s too vague and general assumption but I don’t think that it is a viable scientific methodology not to ask whether someone’s concepts were proved to be reliable or not and instead put the responsibility for failures on individuals mistake. If nobody asks after possible systemic problems and tries to sell the same ideas it could lead to disasters again. And exactly this is happening here, in Hungary.

  7. Hi Wolff,

    “If nobody asks after possible systemic problems and tries to sell the same ideas it could lead to disasters again. And exactly this is happening here, in Hungary.”

    Well I agree completely. See my piece on the unfolding tragedy in Hungary, and the one on the PM resignation this morning, where I say this:

    “Well, we now have a clear pattern being established following the recent IMF interventions in Iceland, Latvia, Hungary etc – the government collapses under the weight of the measures.”

    So since the issue has come up, here’s my view, which I put up in a post back in January.

    What follows is my view, as for the rest of the economists, why not go and ask them what theirs is? I agree we have a totally lamentable situation.


    Now for the methodological part. Basically I am arguing that really it is possible to make reasonably accurate short term forecasts (longer term ones are always – like the weather – much more problematic) on the basis of very little information, the composite PMI is one key reference point here, followed by consumer and business confidence data to give some idea of the immediate outlook, and then employment data to let you know what may happen six months or so down the line. This, and the inflation data (both producer and consumer prices) are all you really need in your home “Chief Economist” amateur toolbox really in order for you to have as good a chance of getting it right as any very highly paid professional.

    But there is something else you also need: a framework in which to organise the information you gather. This is the tricky bit really. The good economist should always be testing, or pressing him- or herself in some way or another. Basically a forecast is based on conformity with empirical fact and with a theoretical framework. The late Sir Karl Popper had something to teach us here.

    Famously, Popper used to enter the first class of any course and give his students one of those thrilling little “ice-breaker” exercises. “Observe”, he would tell them, and then sit down and start to read his newspaper (I doubt it was L’Equipe, or El Mundo Deportivo, but I’m sure you can more or less imagine the picture). Of course, normally not a lot of time would elapse before one of the bemused students would put their hand up and say, “but please, sir, what do we observe?”.

    “Exactly”, would be Popper’s response, and so the course would formally begin, since the simple point he wanted to get across was that simple inductive empiricism doesn’t work, you always need a theory, or at least a hypothesis, to get the game started. Which is why some people could probably stare at the charts I have presented here today, and still not notice anything special.

    And the other point Popper would draw to the attention of any good practicing economist is that you always need to be trying to prove yourself wrong. It turns out we are not, as Bacon thought, playing a game with nature, we are playing it with ourselves. What exactly am I getting at here?

    Well, Popper wasn’t the first to do this, but he did notice that there was a simple problem with inductive empiricism, in that, no matter how many observations you make you can never actually “prove” a theory, since the next observation may well come along (you know, that black swan in Australia) and knock your whole edifice over. Popper was possibly the first, however, to notice that there is a logical asymmetry lying around in all this, since you can faslify a proposition (or hypothesis, or theory, or law), since the first bit of counter evidence you get should at least start you thinking that something may not be completely aright – although, of course, the first piece of counter evidence should never lead anyone to abandon their theory or hypothesis. But it should set you thinking.

    The knack then is, and this is what every worthwhile and halfway serious economist should be trying to do, to try and decide what sort of evidence would make you change your mind, and would lead you to first modify, and then abandon, your theory. And I think if you can’t spell out what it is that would lead you to modify and change your framework, that is if you can’t spell out a body of facts and events which would lead you to seriously change your mind, then you are probably not doing serious economics at all, but playing round with some variant or other of what Popper would have called ideology.

  8. Oliver,

    “Again, a lot of analysis, no usable recommendations.”

    Look, I am putting forward recommendations. If people don’t like them that is up to them. They will know when they get tired of all that suffering:

    a) EU Bonds For Fiscal Stimulus
    b) Qualitative Easing at the ECB (see Krugman for the minor distinction in terminology)to print money and buy the bonds
    c) Let the East into the Eurozone and provide protection for all member states
    d) A very very strong pact to tie the national governments arms and feet, and bring on the reforms (that is the part I think most people don’t like)
    e) Immediate action on gender equality (positive and affirmative action, to compensate for reproductive load inequalities) and to smash the glass ceiling to smithereens to encourage those women who want to have children to do so and keep working under much more congenial conditions. Use the qualitative easing money to do this rather than build more roads and railways. Attack the root fo the problem, and start straightening out these absurd population pyramids now!

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