It's the stock market, stupid!
As stock exchanges from Amsterdam to Tokyo, and from Frankfurt to Hong Kong take a severe knocking, economists say that shouldn't be a reason for panic: stocks and shares may be in chaos, but that's no indication of how the economy is actually doing.
But, despite those reassurances, the Netherlands, for one, has been warned to prepare for less economic growth than originally predicted. Just last weekend, the President of the Bank of the Netherlands, Nout Wellink, made a downward adjustment to the growth forecast for 2008, knocking a whole one percent off the figure to take it from 2.5 to 1.5 percent. The consequences of the credit crisis in the United States are indeed being felt in the rest of the world too.
Message of calm
Meanwhile, however, the general message emanating from the world's central banks is one of calm. The economy is, after all, best served by stability. So, caution has to be observed when it comes to downward adjustments. Economics Professor Sweder van Wijnbergen of the University of Amsterdam thinks Nout Wellink was right to make the adjustment now:
"A slowdown in growth is coming. The effects are already being felt in Germany, so the Netherlands will notice it too."
The problems on the US mortgage (house loans) market began early in 2007 and are ongoing. Now, almost no one seems to doubt any more that the US is headed towards recession. The US economy will probably shrink rather than grow, and the effects will - according to Mr Wellink - also be felt here in the Netherlands. However, that doesn't necessarily mean that the Netherlands will also find itself moving into a recession. Economists are not prepared to go any further than speaking of a slowdown in growth. Professor Van Wijnbergen, too, says there's no immediate need for serious concern in the Netherlands.
Fellow Professor of Economics Eric Bartelsman of Amsterdam's Free University isn't in a very pessimistic mood either:
"Recessions aren't what they used to be."
Not as bad as the 1930s
He says that the last true worldwide recession was the one that occurred in the 1930s. That came about after the worlds' stock markets went into what is known as free fall. In other words, share values plummeted like proverbial stones. He says it has never been as bad again since then:
"The oil crises [of 1973 and 1979] did cause a shock, but no more than that. And when the internet bubble burst around 2000 and the share values started to drop as fast as a speeding bullet, there was some upset for a while. But the economy recovered quickly. Two years later, there was growth again."
Professor Bartelsman foresees few problems on the horizon for Asia or Europe:
"We've got our finances reasonably in order. Unemployment is low [in the Netherlands] and the situation with household debt is in order. I've no immediate concerns."
Shrink in growth but no recession
Professor Van Wijnbergen also thinks it's going too far to start speaking about global recession. The US will indeed see its economy shrink, that's true, and the effects will be felt elsewhere also, even in China - which is so dependent on exports - but with its growth rate of ten percent now, a knock back to, for example, seven percent will still leave it experiencing considerable expansion in growth terms.
According to Professor Van Wijnbergen, the Netherlands is also flexible enough right now to cope with an economic setback. There's little point in taking measures to boost the economy, he says. Additional interest rate cuts will only fan inflation, which is already rising, and that won't help the economy as consumers see goods becoming more expensive.
Government measures aimed at stimulating the economy also serve little purpose, he argues, because by the time the financial boost - lower taxes, for example - starts to have any real effect, the worst part of any downturn is likely to have come and gone again. The professor believes it's just better to ride the storm.
Professor Van Wijnbergen does, however, see some benefit in wage subsidies for people doing unskilled work. That's the group that suffers first and worst as soon as there's any economic setback.
For the rest it's simply a matter of riding the storm. The Dutch economy can apparently handle a knock or two, that at least is the firm conviction of the economists. Meanwhile, however, shareholders are taking some quite considerable knocks.
All in all, it seems that right now is not so much a time to say 'it's the economy, stupid' (the slogan Bill Clinton used so successfully some 16 years ago in his battle for the White House with the incumbent US president George Bush Sr), but more 'it's the stock market, stupid!". And, even then, the current panic on the share markets might just turn out to be no more than a temporary hiccup.
By Wendy Braanker*
[* RNW translation (tpf)]
23 January 2008
[Copyright Radio Netherlands 2008]