Do You Spend $586 billion?
and Chief Economist
brought on a torrent of public stimulus announcements last year. Plans
are being implemented, and the impact on growth is huge. But in the rush
to declare the recession over, there is also concern that stimulus not
be withdrawn too quickly. Good advice, given the math of stimulus
it all up, and one thing is clear: total stimulus is big. For OECD nations as
a whole, pump-priming measures sum to just under 4% of GDP. The big spenders
are South Korea, at 6.1% of GDP, the US at 5.6% and Australia at 5.4%. Canada
matches the G-7 average, at 4.1%. But once again, the high drama is in certain
key emerging markets. China’s splashy $586 billion stimulus plan is a
whopping 13% of GDP, and South Africa’s, a staggering 30% of its GDP. Not
new info, but still amazing.
Another key feature? The measures are compressed. Governments wasted little
time publicizing their plans, and are just as keen to make sure that the funds
hit the street immediately. OECD estimates show that large-country spending is
shoehorned into 2009 and 2010, with a tiny portion already spent in 2008. Data
suggest that implementation, particularly the hefty allocations to
infrastructure projects, has not been as rapid as desired, except in key
emerging markets where lead times can be shorter.
Even so, economies are feeling the impact. The US Cash for Clunkers program
jolted its auto sector out of hibernation. China’s rapid rebound is being
attributed in great part to just-in-time stimulus. And Western economies will
likely see stimulus crest later this year, mercifully, if coincidentally,
occurring just as the credit default cycle peaks. So far, plans seem to be
unfolding reasonably well.
Cynics are worried that plans may actually go too well. Some argue that there
is nothing more permanent than a temporary public spending program. History
tends to agree. But what if the spigots are successfully turned off when
promised this time? The math of the impact is interesting. Finite spending
programs have three general phases: the ramp-up, peak spending (which can
persist for awhile) and the wind-up, where funding comes to an end. As it
happens, the first phase is the only one where GDP is positively impacted.
When spending plateaus, it stops generating bottom-line growth. And even with
substantial spending packages, the ramp-up phase can be quite short.
Consider China’s plan. Suppose the $586 billion is spent over eight
quarters. It is conceivable that spending could ramp up over three quarters,
plateau for four, and drop off in 2 or 3 quarters. If so, the bottom-line
contribution to growth would likely be most dramatic at first, initially
adding as much as 5% to GDP growth (annualized), and 2-3% to the bottom line
in the following two quarters. But without a top-up to the plan, that would be
all the bottom-line bang anyone would see.
The same dynamic holds for all other stimulus plans, leaving us with one
question: will the growth boost from stimulus last long enough for fundamental
global demand to take over? Barely, given the rate at which Western excesses
are being worked off. For once, delayed impacts might be welcome.
The bottom line? Huge amounts of stimulus cash are currently sloshing around
the world. They are impacting growth, and are a great recession-period
opportunity. But the “green shoots” that stimulus has sprouted may yet
take a prolonged pause, delaying our elusive date with recovery.
views expressed here are those of the author, and not necessarily of Export