|Posted by forecastingtool on July 11, 2011 at 3:20 PM|
Following the 2008 credit crunch, the global economy entered a serious recession, marking negative growth rates at 2009, for the first time in 60 years. The initial efforts of the G20 to reinitiate the economy by the deployment of extensive stimulus packages, although successful in the beginning, resulted in the significant rise of public debts challenging the credibility of even the largest economies. Beyond any doubt, this is the most severe economic slowdown that we faced since the Great Depression, with lasting repercussions in the following years. But was this a random incident in our history or could we have predicted it and take the necessary steps to minimize losses?
This will probably be a matter of debate for some time, however, I for one believe that we could. To be more specific, in an article published just a few days prior to the collapse of the Lehman Brothers, evidence was presented about an upcoming economic downfall, near the end of the first decade of the millennium. The analysis was based on a simple logistic growth fit against actual real GDP data.
Fig. 1. Reprinted from Technological Forecasting and Social Change, 76 (3), G.P. Boretos, The future of the global economy, 316–326, Copyright (2009), with permission from Elsevier
According to this model, the global economy follows a two-century growth wave, from 1917 to 2112, attributed to globalization (Fig 1). This period is equally divided into five phases called “seasons” that last nearly 40 years and constitute successive periods of growth, saturation, and decline.
Almost every forty years, near the middle of each season, there is a peak point that initiates a cyclical slowdown of the global economy (Fig 2). The cyclical downtrend occurs when the economy “overshoots” i.e. when the ratio between actual and estimated GDP is at maximum.
Fig. 2. Reprinted from Technological Forecasting and Social Change, 76 (3), G.P. Boretos, The future of the global economy, 316–326, Copyright (2009), with permission from Elsevier
The first two cyclical slowdowns occurred at 1937, near the start of World War II and at 1975, near the outburst of the oil crisis. The next cyclical peak point occurs at 2013, very close to the still raging global economic crisis.
Coming again to the original question, I believe the answer to be a plain yes! Both the two century growth wave and the cyclical forty year trend have been saturating as we are approaching their peak points, 2015 and 2013 respectively. Therefore, if this analysis is right, we should have expected a deceleration of the economy as we were getting closer to the end of the first decade of the millennium. The first signs were there all along and we could have started preparing early on instead of trying to find a last minute solution.
In my opinion, the most important challenge that our economy is facing today is not the recession itself but the absence of suitable “tools” to deal with it, the same situation that we faced during the Great Depression when the economic theory of Keynes appeared. So, should we use the model of the economy presented here to solve all our problems? Well, probably not. I consider this a mere demonstration of how helpful even simple forecasting models can be in addressing critical situations about the economy. Perhaps it was pure luck that the model made a rather accurate prediction of a coming crisis. Or perhaps, it’s no luck at all and this is a good approximation of the economy offering some rough estimates and qualitative insights. Let’s be honest, at this point we cannot really be certain. After all, the inherent problem with all macro level models is that you cannot really experiment with any of these, unless of course you are an elected politician. But what about the existing theories and models? Well, either they failed to foresee the forthcoming crisis so they need to be refined or replaced, or perhaps nobody wanted to disclose the “ugly” truth, or even worse nobody listened. I don’t know which option is worse but I do think that we need to work hard on our forecasting “conscience” and techniques if we are to improve our “visibility” and optimize the impact of different government policies on a macroeconomic level.