ECON621Topic 2

Trends in the World Economy

Introduction• What do we mean "trends in the world economy"?• The long-run (when we are dead)

• The shifts in GDP• But what does the future hold for production and employment

• The recent past• Post the 2008 financial crisis: The Second Great Contraction

• This year• Greece and the Euro• And in the background there is the US fiscal cliff

• This week• Global slowdown• The pain in Spain

Long-run trends in growth and development

Super-cycles in output, employment, prices

The third industrial revolution• New machines, processes and materials are changing

production:• 3D printers and robots.• More models from the same production line.• Composite materials replacing steel and aluminum.

• Which has serious implications:• Fewer workers are needed and they have to highly skilled.• The cost of labour is less important and so is outsourcing.• SMEs can participate and compete.• More opportunities in the green economy.

Employment• Globalisation has

brought people into the global labour pool, raising productivity and incomes.

• But following the great contraction there has been increased unemployment, rising inequality and high rates of youth unemployment.

Why the Second Great Contraction?• Rogoff argues that it is more than a great recession.• The contraction applies not only to output and

employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete.

• This has important implications for policy.• There is no quick escape without a scheme to transfer

wealth from creditors to debtors, either through defaults, financial repression, or inflation.

So where is the world at?• EU.• US.• Policy options?• What does this imply for developing economies?

• What's happening in China?• In India, Brazil?• South Africa?

• Global slowdown…

The world this week• Spanish borrowing costs

increase.• Moody's outlook for the German

economy negative.• In the UK, GDP contracts

for third quarter in a row.• Thailand kept their repo rate unchanged.• The Russian ruble lost ground to the dollar.• Adverse weather conditions and food price inflation.

The way forward?• Paul Krugman said that Rudi Dornbusch said that crises are always

like this:

"The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought, and that's sort of exactly the Mexican story. It took forever and then it took a night".

• A shotgun wedding in the EU?• Lower interest rates or more inflation in the US?