Alexis Antoniades on the Future Global Economy

Resuming its annual Public Affairs Programming series after the summer break, CIRS kicked off the 2009-2010 academic year with a Monthly Dialogue lecture by Alexis Antoniades, professor of economics at the Georgetown University School of Foreign Service in Qatar. The Monthly Dialogue, entitled “The Future of the Global Economy,” took place on September 8, 2009 and was attended by ambassadors and embassy representatives, Georgetown University and Education City faculty, as well as interested members of the public.

Dr. Antoniades spoke on three distinct areas: he took the audience through a general overview of the current economic recession and its relationship to past events, he then relayed the consequences of the crises and its international impact, and, finally, he outlined several short-term and long-term recovery strategies for overcoming the current crisis. Noting that in order to predict what the future of the global economy might look like, Antoniades said that it was necessary to first analyze the factors that have produced the current situation. The global economic crisis that began in 2008, he noted, was unlike any of the past international recessions, and did not fall into any certified pattern.

Summarizing the consequences of the global recession on the United States, he noted that “we have extremely high unemployment now and it will probably not come down anytime soon. We have lower trade, lower output, lower consumption spending, and a higher savings rate. This is not typical of past recessions.” Antoniades showed comparisons between different economic recessions at different historical and geographical points, including the great 1920s depression in the United States and the recession in Japan in the 1990s.

The primary trigger for the current economic decline was located in the housing market in the United States. The sub-prime crisis, Antoniades said, was caused by a number of factors, starting with the Clinton administration in the United States and its active push for a home-ownership scheme. Banks acted accordingly, giving out loans to applicants regardless of their high-risk status and their inability to honor the pay-back schemes. Banks, investment firms, and other related finance institutions, by selling off their loans and increasing their leverage, engaged in a number of financial innovations and manipulations rather than monitoring the activities played out in the housing market. The simultaneous increase in interest rates, house prices, and loans meant that this real-estate bubble had to burst.

A major consequence of the current financial crisis is the increasing rate of unemployment. It is important to note, Antoniades said, that it is not just the magnitude of unemployment that is of concern, but the speed at which it has escalated. Currently, in the Unites States, “unemployment is at 9.7%, and is expected to go up.” This figure, he said, actually understates the rate of unemployment because it does not take into account the percentage of discouraged workers: people “who decide to exit the labor force, to take early retirement or who decide to go back to school.” If these were added to the count, “the number would actually be 11%.” By looking at the last two recessions in the United States, “we notice that unemployment doesn’t actually go down after the end of the recession; it keeps going up, so things do not look good.” Another interesting measure, Antoniades noted, is “capacity utilization,” which measures how much of a country’s economy is being utilized. He noted that “at this point, the U.S. economy is working at 67-68% of its capacity, the lowest it has been since 1962.”

[Graph showing unemployment levels in the US] American consumers are known for being resilient and for being big spenders, but the recession has curbed this attitude. Antoniades argued that “Consumers will become savers. This is something new for the U.S. economy.” He noted that “This is the first time that we have a positive savings rate; it went up to 7% in May, where it used to be 0% before.”

To have sustainable growth and a sustainable recovery, there needs to be consumer confidence: people need to spend so that money circulates and creates growth in the economy. Firms and businesses also need to invest in new endeavors to raise output and facilitate growth. But this cycle is broken because, for growth to happen, consumers and businesses need to acquire loans from banks, which is something that is unlikely to occur in the current frugal climate.

Many analysts and economists determine recoveries, Antoniades said, as either V shaped, meaning that the economy declines, but there is a speedy recovery; U-shaped, meaning the economy declines, remains down for a while, and then recovers; or L-shaped, meaning that the economy declines and then flat-lines, making the recovery a long and arduous process. He argued that in his opinion, an L-shape recovery would be closest to what the current global economy is currently experiencing in its recovery phase.

According to Antoniades, as a consequence of the current global economic recession, there will be major restructuring and rebalancing of the U.S. economy, but it will not go back to its former state, and “this,” he noted, “is not a bad thing.” Although high unemployment is undesirable, high savings rates and low debts are a positive. For these reasons, it is impossible for the U.S. economic recovery to result from domestic spending in the short-run. Antoniades argued that “the recovery will come from abroad, especially Asian countries and countries with big economies – Brazil, Russia, India, and China.” China, in particular, will stimulate the global recovery, as it will outperform all other countries in the coming years leading to enormous growth. As China grows, consumers will start spending more and saving less. This change in consumption behavior by the Chinese will increase the demand for consumption goods, especially for goods imported from advanced economies like the United States. Consequently, advanced economies will be able to exit the prolonged recession through this export-led recovery.

Although the U.S. has long been the world leader in innovation, education, and technology, in the long-run, these other developing countries will catch-up in record time. The rapid growth of these developing economies, however, will put enormous stress on the environment and on resources, which will cause long-term degradation and pollution. Antoniades concluded on a positive note for the United States by arguing that “there is an opportunity here for advanced economies,” because they still have superior technological ability in comparison to the rest of the world. The U.S. can thus “invest in clean and green technology and then export their expertise and products to China and the other Asian countries,” thereby facilitating innovation and maintaining its pole position in the world economy.

[Pie Charts comparing the growth in US and Developing Economies] Alexis Antoniades is Visiting Assistant Professor at the Georgetown University School of Foreign Services in Qatar. He received a B.A. in Mathematics and in Economics from the University of Wisconsin at Madison in 2001 as a Fulbright Scholar, and a Ph.D. in economics from Columbia University in 2008. In 2001-2002, Antoniades worked as assistant economist at the Federal Reserve Bank of New York where he co-authored two papers on forecasting inflation and on developing an index for activity in the technology sector. The Bank now publishes this tech index monthly. His current research focuses on inflation issues, and on the effects of monetary unions and exchange rates. He is awarded a three-year Qatar National Research Fund grant to undertake the first microstrudy on the economies of the Gulf countries. He advices the Qatar Statistics Authority on harmonizing inflation measures across the Gulf countries and collaborates with the Qatar Central Bank on monetary policy issues. At GU-Q, professor Antoniades teaches courses on international finance, international trade, and money and banking. 

Article by Suzi Mirgani, CIRS Publications Coordinator.