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.
tions about the&
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
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
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
Deep recession-weak recovery, 5 percent.
Shallow recession-weak recovery, 50 percent.
Deep recession-strong recovery, 15 percent.
Shallow recession-strong recovery, 30 percent. …