Can we get rid of this mood of “gloom and doom”?

IS the world economy coming to a catastrophic, grinding crash? Would we see a global meltdown with GDP in a tailspin, investment going down sharply, and unemployment levels on a scale last seen during the 2008-09 financial crisis? The short answer is a "no". According to all major economic models, neither the world economy nor the economic situation in any single country is veering towards a major recession. It cannot be gainsaid that some countries, particularly the oil-exporting countries such as Nigeria, Ecuador, or Russia, might need to tighten their belts a little more and for a longer time period unless the price of crude oil bounces back soon, which is unlikely. And, some of the larger developed economies will possibly experience economic growth which may be slower than expected than only last December. But that is all. A majority of forecasts I have seen so far predict that the financial sector will bounce back by mid-year, inflation should hold steady, and the largest problem child, the Chinese economy, shall recover by 2018 from the turbulence of the last six months.

Why am I so optimistic? Well, first of all as we all know, the glass may be considered half-empty or half-full depending on your perspective. The recent decline in oil prices (which has been going on since 2014) has caused some moods to sour, and bankrupted some free-wheeling oil-exporting countries. Add to that, a string of bad news coming out of the China, which appears to point to endless rounds of fits and starts, had caused economic forecasters to earlier raise an "amber alert". Undoubtedly, this means that we might experience some extra months of economic slowdowns. But slowdowns do not portend "hand-landing".  The current crisis, if we can call it that, has been coming for months, and the system has been preparing for it, and is well capable of handling the problems they could cause. For example, Saudi Arabia and the Gulf countries have sufficient reserves to handle any financial ripples caused by budgetary shortfalls. China has predicted that while its economy is progressing only gradually on the path of structural changes, it is on its way to 6 percent economic growth.

Secondly, oil prices really have hit rock bottom, and it is bouncing back. While nobody expects the price of crude oil to go back to the $80-90 range in the next few years, by mid-summer, it will hover around the $50 mark. Demand would have picked up by then and the glut in the oil market will be less egregious. Automobiles, tourism, travel, and the Summer Olympics will give most countries a shot in the arm. 

Thirdly, it is expected that the expansionary measures taken by central banks in EU, Japan, and China will manifest itself in robust housing and manufacturing growth. European Central Bank President Mario Draghi, a firm believer in activist monetary policy, recently reiterated ECB policy to use quantitative easing (QE) and added, "if these developments change in directions that make it necessary to respond again, we are of course ready at any time to adjust this array of tools". ECB is currently carrying on a strategy of stimulus with $67 billion per month of QE and a deposit rate minus 0.3 percent.

Finally, the world economy now has a cluster of "emerging markets" (EM) that has a powerful influence on economic and trade movements, and research shows that consumer spending is accelerating in the oil importing EM. Capital Economies, a consulting group, estimates that in the EM of Asia, excluding China, consumer spending is expected to grow at a rate of an average of 4.7 percent a year from 2015 to 2020, a significant jump from the 3.9 percent average annual rate of growth seen in the past decade. GDP forecasts for 2016 indicate that all the fast-growing countries in Asia will maintain a 6 percent or over growth rate. Outside the region, Morocco and Egypt are expected to grow at more than 4 percent, according to IMF estimates.

Now, let me turn to some of the potential dangers lurking behind the curtains as we go full throttle into 2016. Both financial and commodities markets are very volatile nowadays. Price of stocks and oil, in particular, are exhibiting constant upswings and downswings.  One must point out that there is also an extra element of uncertainty injected by the lower oil prices and higher volatility in the global commodities market. This uncertainty emanates from the "shocks" we witnessed in the recent past: downward spiraling oil and commodity prices; China's uncertain economic prospects; and increased and sustained swings in global stock prices. It is clear that lower oil price is dragging the financial market down. According to Dow Jones data, since August 19 last year, oil has moved in the same direction as the Dow more than 72 percent of the time, compared with 51.98 percent for all of 2014 and more than 57 percent in 2015.  "This isn't the typical relationship between the two assets. The long term correlation between oil prices and stocks going back to 1973 has been almost zero or negative 1.1 percent. In other words, for more than 40 years, oil and stock prices have usually moved independent of each other."

There is also a small group of economists who are pessimistic that we will see the like of sustained average 2-4 percent growth seen in the last decade. In a recent op-ed in this newspaper, Joseph Stiglitz and Hamid Rashid identified three negative drivers: lower level of investment, adverse impact of fiscal and monetary policy, and rise in inequality. They also point to greater volatility in growth rates in advanced countries. Such concerns have also been voiced by Jeffrey Sachs (who nonetheless mocks the "secular stagnationists", or gloom and doom theorists) and Mohammed El-Arian. In his new book, The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse, El-Arianis is very cautious about the effectiveness of the central bank to leverage monetary policy in steering the economy. He cited the theme of "fundamentals pushing markets down and liquidity not being there" to prop them back up. A path of "liquidity-supported growth" driven by years of easy Fed policy will "likely end," El-Erian contended. Some of the recent stock market decline seems to fit into this narrative, with Down Jones down 9 percent and possibly signaling a bear market.

Confounding the scenario is the muddle that economists and statisticians have created with "Lies, damn lies, and statistics". Economists often look at the same data and draw conflicting opinions. For example, the GDP last year increased or decreased depending on what price index you use: Euro, Dollar, or PPP. Measured in dollars, GDP declined by 5 percent from $77.3 trillion to 73.5 trillion last year.  However, if GDP is recomputed in Euros, it increased by 13.6 percent. On the other hand, using PPP, the International Monetary Fund found world output grew by 3.1 percent. Can you imagine a doctor telling a patient she has flu depending on whether Celcius or Fahrenheit is the measure used to measure body temperature?

The writer is an economist and the author of a recent book Economics is Fun: Short Essays for the Masses.