Economists Find Big Spread in Recovery Forecasts

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Economists once thought that by using computers and large-scale econometric models, they could develop tools for more accurate forecasting. But such hopes have given way to the more humble belief that the best they can do is to state what they think are the odds on various possible developments ("scenarios" in the current economic jargon). The problem of macroeconomic forecasting has been made even more difficult by the complex interactions between national economies and the world economy. Prof. Rudiger Dornbusch of the Massachusetts Institute of Technology says the world economy is now in the midst of a "significant slowdown," with outright recession in the Anglo-Saxon countries and minimal growth in Europe, except Germany. Only Asia is keeping up the momentum of world growth, but even there Japan's growth rate is slipping below 4 percent. The most& important ques- tions about the& world economy, he says, focus on the United States and Germany: Will the United States come out of the recession in the next few months, and can Germany resolve its inflation problem before a sharp slowdown sets in and topples the rest of continental Europe? He lays out three "plausible scenarios:"

Optimistic: The American recession touched bottom in the April-June quarter and the recovery is starting. Germany cuts its interest rates this summer and Europe enters an upswing by late fall. (30 percent probability).

Pessimistic: The U.S. recession is far more durable than the consensus of economists expects, because taxes are too high, debt keeps consumers and businesses from buying durable goods and the Federal Reserve is too slow and provides inadequate stimulus to turn the economy around. Germany's inflation proves a hard nut to crack. There's a serious chance of world recession by fall and nk turnaround before the middle of next year. (20 percent probability).

Central scenario: The U.S. recovery is about ready to start. Germany, preoccupied with inflation, lets Europe slip to the edge of recession. The disparity between a recovering U.S. economy and a declining Europe puts upward pressure on the dollar, complicating Europe's inflation problem and slowing American growth down the road. (50 percent probability). These three add up to 100 percent, implying that no other outcome is possible. For different combinations of U.S. recession and recovery, Dornbusch sets up a grid of four probabilities:

Deep recession-weak recovery, 5 percent.

Shallow recession-weak recovery, 50 percent.

Deep recession-strong recovery, 15 percent.

Shallow recession-strong recovery, 30 percent. …