Global Economic Outlook 2013

The global economy has yet to shake off the fallout from the crisis of 2008-2009. Global growth dropped to almost 3 percent in 2012, which indicates that about a half a percentage point has been shaved off the long-term trend since the crisis emerged. This slowing trend will likely continue. Mature economies are still healing the scars of the 2008-2009 crisis. But unlike in 2010 and 2011, emerging markets did not pick up the slack in 2012, and won’t do so in 2013. Uncertainty across the regions – from the post-election ‘fiscal cliff’ question in the U.S. to the Chinese leadership transition and reforms in the Euro Area – will continue to have global impacts in sluggish trade and tepid foreign direct investment.

Main results:

• Across the advanced economies, the Outlook predicts 1.3 percent growth in 2013, compared to 1.2 percent in 2012. The slight uptick is largely due to the Euro Area, which is expected to return to very slow growth of 0.2 percent after the -0.6 percent contraction in 2012. U.S. growth is expected to fall from 2.1 percent in 2012 to 1.8 percent in 2013.
• In the medium-term, the outlook expects the U.S. and other advanced economies to go some ways toward closing large output gaps – that is, the difference between current output and the level of output an economy can produce in a noninflationary way, given the size of its labor force and its potential to invest in and create technological progress. The current output gap is a result of weak demand due to the 2008-2009 crisis. This development should allow the U.S. to average 2.3 percent annual growth during 2013-2018 before falling to 2.0 percent in 2019-2025. In the same two periods, Japan is expected to grow at 1.1 percent and 0.9 percent, respectively.
• A more significant slowdown is expected for less mature economies over the next year – and beyond. Overall, growth in developing and emerging economies is projected to drop from 5.5 percent in 2012 to 4.7 percent in 2013, with growth falling in China from 7.8 to 6.9 percent and in India from 5.5 to 4.7 percent. From 2019-2025 emerging and developing countries are projected to grow at 3.3 percent.
• The long-term global slowdown we project to 2025 will be driven largely by structural transformations in the emerging economies. As China, India, Brazil, and others mature from rapid, investment-intensive ‘catch-up’ growth to a more balanced model, the structural ‘speed limits’ of their economies are likely to decline, bringing down global growth despite the recovery we expect in advanced economies after 2013.

StraightTalk^®

Global Outlook for Growth of Gross Domestic Product, 2013-2025 (November 2012)

*Europe includes all 27 current members of the European Union, as well as Switzerland and Norway.
**Other advanced includes Canada, Israel, Iceland, Korea, Australia, Taiwan Province of China, Hong Kong, Singapore, and New Zealand.
***Southeast Europe includes Albania, Bosnia & Herzegovina, Croatia, Macedonia, and Serbia & Montenegro, and Turkey.
Source: The Conference Board Global Economic Outlook 2013, November 2012

Global Outlook for Growth of Gross Domestic Product, 1996-2013 (November 2012)

*Europe includes all 27 current members of the European Union, as well as Switzerland and Norway.
**Other advanced includes Canada, Israel, Iceland, Korea, Australia, Taiwan Province of China, Hong Kong, Singapore, and New Zealand.
***Southeast Europe includes Albania, Bosnia & Herzegovina, Croatia, Macedonia, and Serbia & Montenegro, and Turkey..
****The percentage contributions to global growth are computed as log differences and therefore do not exactly add up to the percentage growth rate for the world economy.
Source: The Conference Board Global Economic Outlook, November 2012.

Comparison of Base Scenario with Optimistic and Pessimistic Scenarios, 2013 - 2025 (November 2012)

*Europe includes all 27 current members of the European Union, as well as Switzerland and Norway.
**Other advanced includes Canada, Israel, Iceland, Korea, Australia, Taiwan Province of China, Hong Kong, Singapore, and New Zealand.
***Southeast Europe includes Albania, Bosnia & Herzegovina, Croatia, Macedonia, and Serbia & Montenegro, and Turkey.
Source: The Conference Board Global Economic Outlook 2013, November 2012

About The Conference Board Global Economic Outlook

The Conference Board Global Economic Outlook 2013 provides projections for the output growth of the world economy for 2013, 2014-2018, and 2019-2025, including 11 major regions and about 50 advanced and emerging economies. Most forecasters only focus on the next year or two, while the International Monetary Fund provides an outlook that projects five years ahead. By extending projections based on a growth accounting model, looking at the contributions of labor, capital and productivity, over more than a decade, The Conference Board outlook can identify underlying structural changes in the economy.

• For detailed methodology, click here.
• For underlying data, click here.

Methodological Notes

• Short-term (2013) projections are based on The Conference Board U.S. Economic Forecast, The Conference Board Leading Economic indexes (LEIs) for 11 countries/regions, and secondary sources, such as the World Economic Outlook (International Monetary Fund), the Economic Outlook (Organization for Economic Cooperation and Development), European Commission and Congressional Budget Office.
• Medium-term (2014-2018) and long-term (2019-2025) projections are based on a growth accounting model, looking at the contributions of labor, capital and total factor productivity to growth. Growth in labor is approximated by the growth in working age population. Capital growth and total factor productivity growth are estimated by system of equations which are largely based on relevant past-period variables and some economic variables.
• The projected GDP growth, based on the growth accounting framework, is considered relative to measured trend growth of an economy. Our optimistic and pessimistic scenarios are based on the deviation of capital growth and total factor productivity growth from their respective trend growth.
• The calculation of measures of regional and global GDP growth requires levels of GDP to weigh the growth rates of individual countries and regions by their size of GDP. The country and region GDP weights are current weights, which are the average for the beginning and the end of each period, and which are benchmarked on purchasing power parity (PPP)-adjusted GDP from Penn World Table 7.0.

Detailed Methodological Notes

 The Conference Board of Canada

Global economy risks falling into renewed recession, warns UN report

Robert Vos, Director of the Development Policy and Analysis Division of the UN Department of Economic and Social Affairs at the launch of the World Economic Situation and Prospects 2013 report. UN

18 December 2012 – World economic growth has weakened considerably during 2012 and is expected to remain subdued in the coming two years, says a new United Nations report, which calls for policy changes to spur growth and tackle the jobs crisis. 

The World Economic Situation and Prospects 2013, the first chapter of which was published today by the UN Department of Economic and Social Affairs (DESA), states that the global economy is expected to grow at 2.4 per cent in 2013 and 3.2 per cent in 2014 – a significant downgrade from the UN’s forecast of half a year ago.

“This pace of growth will be far from sufficient to overcome the continued jobs crisis that many countries are still facing,” said a news release on the report. “With existing policies and growth trends, it may take at least another five years for Europe and the United States to make up for the job losses caused by the Great Recession of 2008-2009.”

Noting that weaknesses in the major developed economies are at the root of the global economic slowdown, the report stresses that most of them, but particularly those in Europe, are trapped in a “vicious cycle of high unemployment, financial sector fragility, heightened sovereign risks, fiscal austerity and low growth.” 

Several European economies and the euro zone as a whole are already in recession, and euro zone unemployment increased further to a record high of almost 12 per cent this year. Also, the US economy slowed significantly during 2012 and growth is expected to remain “meagre” at 1.7 per cent in 2013. Deflationary conditions continue to prevail in Japan.

The economic woes in Europe, Japan and the US are spilling over to developing countries through weaker demand for their exports and heightened volatility in capital flows and commodity prices. 

“A worsening of the euro area crisis, the ‘fiscal cliff’ in the United States and a hard landing in China could cause a new global recession. Each of these risks could cause global output losses of between 1 and 3 per cent,” warned Rob Vos, Director of DESA’s Development Policy and Analysis Division and team leader for the report. 

Stating that present policies fall short of what is needed, the report calls for changing course in fiscal policy and a shift in focus from short-term consolidation to robust economic growth with medium to long-term fiscal sustainability. 

It also recommends avoiding premature fiscal austerity, while noting that the reorientation of fiscal policies should be coordinated globally and aligned with structural policies that support direct job creation and green growth. In addition, it recommends that monetary policies be better coordinated globally and regulatory reforms of financial sectors be accelerated to stem exchange rate and capital flow volatility, which pose risks to the economic prospects of developing countries.

Unite Nation News Centre

Global Economic Prospects

<!-- Comment for Shift-JIS Japanese Encoding problem dont delete

Home • Site Map • Index • FAQs • Contact Us About Countries Data & Research Learning News Projects & Operations Publications Topics Search   Prospects for the Global Economy All   Home > Data & Research > Prospects > Prospects for the Global Economy Home Overview & main messages Global outlook summary table Recent developments Headwinds Outlook Risks Challenges Conclusion Regional outlooks Bibliographic references Analytical tools and resources Regional detailed forecasts Commodity forecasts About this site Related sites Country abbreviations

Malaysia’s elections:Down to the wire

ALL year, it seems, Malaysia has been on a war footing. For elections, that is—and thankfully, rather than anything more martial. The country operates on a Westminster-style parliamentary system, so the prime ministers’ five-year term does not officially end until early next summer. Nonetheless, Najib Razak and his people have been talking up the chances of going to the polls before then pretty well continuously over the past 18 months or so, which keeps everyone guessing.

Now, with the end of the year in sight and no further announcements, it seems that Mr Najib will take this down to the wire. Given that he can only go to the country after Chinese New Year next February, most people expect him to plump for the latest date he can in the electoral calendar, which would be about late March or early April.

His supporters say, why rush? With a generally favourable economic outlook, tame state media and all the advantages of incumbency, there is no reason why Mr Najib can’t enjoy the rest of his term of office without worrying about the 13th general election. After all, he has a bit of history on his side, to put it mildly—the ruling political alliance, Barisan Nasional (BN), has never lost a general election since independence in 1957.

His critics, however, detect signs of nervousness about the outcome—mainly, the endless indecision about when to go to the polls. Indeed, all the evidence suggests that this will be the closest race in Malaysia’s history, even more so than the last general election in 2008. On that occasion, the BN lost its two-thirds majority in parliament for the first time, thus losing its powers to make changes to the constitution. Just as bad, five of the 12 contested state legislatures were won by the opposition, compared with only one in the previous election. Mr Najib knows that to placate his hardline critics within the BN he has to not only win, but win big. They want the BN to claw back most of what the party lost last time. It’s a tall order.

With so much at stake, every vote counts…but only if every vote is counted. Democracy activists and other election-watchers are concerned that many of the criteria for a free and fair election have not been met by the government and the government-appointed Election Commission.

Over the past few years the campaign for open and fair elections has been led by Bersih (meaning “clean” in Malay), a loose coalition of civil-rights and human-rights NGOs and others.

The head of Bersih, Ambiga Sreenevasan, sounded gloomy last week about the prospects for this election. “It will be the dirtiest election we have seen for a long time”, she warned. She points to the more overt signs of this, such as “increasing political violence” (at political rallies, for example) and more subtle signs such as “constant reports of discrepancies on the electoral roll in west Malaysia.”

Having campaigned for very specific improvements to the conduct of elections, Ms Ambiga says that the authorities have take action only with respect to the proposal that voters be marked with indelible ink (and even then not entirely to her satisfaction). On everything else, such as the neglected right of all sides to enjoy equal access to the media, Ms Ambiga says that the electoral authorities “give me and Bersih no reason at all to believe that anything will change before the election”.

With official overseas election observers (apart from ASEAN) apparently considered unnecessary by the government, Bersih is setting up its own “citizens-observers’ campaign”. Mr Ambiga says that they need 30,000 observers, but expect to get only 10,000. Bersih will train them. They might soon be busy people.

Economist

Rise in domestic debt places Malaysia at risk of crisis, economists warn

By Ida Lim

December 24, 2012

Kuala Lumpur skyline at dusk. WSJ reported that Malaysia had one of the higher figures of debt levels in the region, with the country’s credit-to-GDP ratio this June rising to 117 per cent from 96 per cent in late 2007. – Reuters pic

 

KUALA LUMPUR, Dec 24 – Economists warn that a rise in domestic debt that has been keeping Asia’s economy strong could place the region, which includes Malaysia, at risk of a major crisis, the Wall Street Journal (WSJ) reported.

 

The WSJ noted the great increase in the number of loans being taken by Asian businesses and individuals due to the low interest rates offered by banks.

But Frederic Neumann, co-head of Asian economic research at HSBC, warned that the Asia could be at the brink of a major debt crisis, saying: “I believe we are at the beginning of a major debt cycle in Asia.”

“We are certainly seeing the early symptoms of a debt bubble emerging, and I think it’s worth keeping a close eye on,” he told the international business paper last Friday.

The WSJ reported that Asia’s debt levels had jumped far greater than the troubled Euro zone and the US.

Asia’s credit-to-GDP ratio shot up to 104 per cent this June from 82 per cent in December 2007, while the Euro Zone’s was a slower rise of 131 per cent from 123 per cent and the US’ ratio had went down by one per cent to 62 per cent.

“If you look at the speed of increase in credit growth in virtually all Asian countries, if that’s maintained, in two to three years the situation’s going to come to a head.

“Northeast Asia, Singapore, Malaysia and Thailand all are at risk in this regard,” Neumann said.

WSJ reported that Malaysia had one of the higher figures of debt levels in the region, with the country’s credit-to-GDP ratio this June rising to 117 per cent from 96 per cent in late 2007.

Hong Kong and Singapore had a high ratio growth in the same five-year period, with the former’s ratio climbing to 275 per cent from 183 per cent, while the latter went up to 137 per cent from 87 per cent. Indonesia only grew to 33 per cent from 25 per cent.

The International Monetary Fund reportedly said that an increase in the credit-to-GDP ratio of above five percentage points a year, coupled with a rise in equities prices of at least 15 per cent, would show a 20 per cent chance for a crisis to happen within the coming two years.

But governments in Asia, including Putrajaya, have moved to cut down on debts within the country.

Putrajaya has tightened regulations for housing loans and discouraged the chalking up of huge credit card debts.

According to the WSJ, the World Bank had warned Asian countries with high jumps in their debt levels to be alert and act to cut down on risks.

Malaysia had been hit with a financial crisis along with the rest of Asia in 1997.

Although Asian economies have recovered and picked up growth since then, governments are trying their best to avoid a repeat of the painful episode.

Like other Asian countries, Malaysia now continues to rely on increasing domestic demand to drive its economy, which grew by a strong 5.2 per cent in the third quarter this year, despite weaker export figures.

Daniel Martin echoed Neumann’s worry, saying that letting credit growth drive the economies could be risky.

“I think there’s now a danger, the way the global economy is, that increasingly Asia comes to rely on loose monetary policy and rapid credit growth to compensate for weak exports,” the economist for Asia at Capital Economics was quoted saying by WSJ.

One of the best inspirational videos ever - Susan Boyle

Understanding economics:Priceless

WHAT is economics concerned with? A layman taking in the raging debates over financial stability, inflation, economic growth, and budget deficits, would say it’s about money. That, of course, is not right. Money matters only insofar as it is a proxy for welfare. Money is a handy way of denominating prices and economists love prices because they are so efficient at allocating supply and demand so as to maximise welfare. Yet markets do not have to have money or prices to serve that welfare-maximising function. That distinction lies at the heart of the work that won this year’s Nobel Prize in economics, the subject of this week’s Free Exchange column.

Lloyd Shapley of UCLA and Alvin Roth of Stanford University got the prize for studying the barriers to welfare maximisation in markets without prices: examples including matching college applicants to colleges, kidney donors to recipients, and even husbands to wives.  Mr Shapley and David Gale (now deceased) devised an algorithm 50 years ago that would maximise the satisfaction of such multi-sided matching games. Read the column to learn more about  how the theory works and its applications. I want to focus here on a more philosophical implication of their work.

Mr Gale’s and Mr Shapley’s seminal 1962 paper was somewhat whimsical. Imagine a man, John, in love with a woman, Mary, but Mary is married to someone else. So John marries someone else as well. What if a year later he discovers Mary really does love him? Odds are they will find a way to be together, but it may involve infidelity, divorce and scandal (Prince Charles and Camilla can relate). On the other hand, if Mary really loves her husband more than John, both marriages will endure.  Mr Gale and Mr Shapley devised an algorithm that would match partners in a way to minimise the number of unstable marriages and maximise the number of stable ones.

Mr Gale and Mr Shapley acknowledged that their marriage-matching algorithm had “entered the world of mathematical make believe.” But they went on to make a larger point:

Our result provides a handy counterexample to some of the stereotypes which nonmathematicians believe mathematics to be concerned with. Most mathematicians at one time or another have probably found themselves in the position of trying to refute the notion that they are people with ‘a head for figures’ or that they ‘know a lot of formulas’. At such times it may be convenient to have an illustration at hand to show that mathematics need not be concerned with figures … [our theorem] is carried out not in mathematical symbols but in ordinary English; there are no obscure or technical terms. Knowledge of calculus is not presupposed. In fact, one hardly needs to know how to count. Yet any mathematician will immediately recognize the argument as mathematical, while people without mathematical training will probably find difficulty in following the argument, though not because of unfamiliarity with the subject matter. What, then to raise the old question, is mathematics? The answer, it appears, is that any argument which is carried out with sufficient precision is mathematical, and the reason that your friends and ours cannot understand mathematics is not because they have no head for figures, but because they are unable to achieve the degree of concentration required to follow a moderately involved sequence of inferences.

In a similar way, Mr Shapley's and Mr Roth's Nobel prize illustrates a larger point about economics. Undergraduates often study “utility functions” to learn how people choose alternative consumption baskets in a way that makes them better off. Once they go on to graduate school and then a job, they deal almost exclusively with priced transactions: for wheat, autos or equities.

Yet in countless private and public policy questions, welfare can be improved in ways that do not show up in the price. Mr Roth’s work on public school admissions and kidney donations are an obvious example, but there are countless others.  I recall reading that Starbucks had a plan that would let an employee in one store trade jobs with an employee in another so that both could work closer to home. The result would not change either employee’s output or wages, or Starbucks’ profits. Conceivably GDP would fall because the employees would spend less on petrol or bus fare. But provided the swap was voluntary, the welfare of both would without question rise.

During election season, presidential candidates invariably defend their policies in terms of dollars or jobs: Barack Obama’s health care plan will save a family so much on insurance; his green energy investments will create so many jobs. Mitt Romney’s voucher plan will reduce Medicare’s costs. Yet some of the greatest welfare impacts of these policies can’t be priced. Obamacare eliminates much of the anxiety that hangs over every uninsured worker who worries about a financially crippling disease or injury. That surely must raise welfare. The energy efficiency standards imposed on makers of automobiles, appliances, toilets and light bulbs may save consumers’ money, but deprive them of choice: if you want a faster but less efficient dishwasher, you can’t buy one anymore. That is a loss of welfare that is not incorporated in regulators’ cost-benefit analysis. Nick Rowe once beautifully illustrated the flaw in the theory that public works projects, no matter how useless (such as digging holes and filling them in) were an effective form of stimulus in a liqudity trap. Truly useless projects may raise GDP, he noted, but they did not raise welfare, so the government may as well just hand the cash over to the workers.

Contrary to the claims of Mr Romney and Paul Ryan, vouchers won’t solve Medicare’s long-term cost problem. Experience suggests the introduction of competition has only a transitory impact on health cost growth. Yet vouchers offer Medicare beneficiaries something they don’t have now: choice. By letting them allocate their Medicare dollars to an insurance plan that better suits their idiosyncratic preferences, they can achieve a higher welfare than if the same money were spent on the same plan everyone gets. (Note that proviso: the same money. If the voucher is worth less than the money they would have otherwise spent, the impact on welfare is ambiguous.) The value of that choice is not easily quantified, but it is real. It may not be obvious to presidential candidates, but that's why we have economists.

Economist

A golden age of micro

MICROECONOMISTS are on the march, winning top awards, helping battle the crisis, and advising the world’s most innovative firms. This week the trend continued, with the Nobel Prize going to two microeconomists. Why are they doing so well?

First up, microeconomists seem to be very good at building new findings on old foundations. Take the Nobel Prize, covered by a colleague in the Free exchange print article—Game, set and match—this week. The prize went to economists who built on cooperative game theory, an ancient development by economic standards (one of the main papers was published in 1962). Cooperative game theory looks at how well people can do when acting together; by examining all the possible combinations, theorists can spot outcomes that individuals acting alone cannot achieve. They then focus on something called the “core” of the game—those outcomes that are “stable” in the sense that no subgroup would do better by breaking away and acting alone. So far, so theoretical. But the theory is pivotal in understanding how to set up medical job-matching system in a stable way so that no hospital or medical school wants to break off and set up alone. Fifty years on, there are other applications too: cooperative game theory is still being used in cutting edge auction design.

And the Nobel is just one example of real-life problems solved by micro. A thoroughly macroeconomic problem—unconventional monetary policy—is another. In 2007 and 2008, central banks and finance ministries decided that it was a good idea to follow this policy which involves exchanging good assets (cash or treasury bills, for example) for illiquid ones. But working out exactly how to do it was a very different question. One major stumbling block was to work out what price to pay for the bad assets: markets were thinly traded and prices often did not exist.

Micro theorists came up with the answers. In America, various academics advised the US Treasury in 2008. But the best example of micro in action is Britain, where the Bank of England uses a new type of auction—the Product Mix auction—designed by Paul Klemperer. The Bank’s Governor, Sir Mervyn King, clearly finds micro theory useful:

“The Bank of England’s use of Klemperer auctions in our liquidity insurance operations is a marvellous application of theoretical economics to a practical problem of vital importance to financial markets.”

There is an important lesson about making cutting edge economics accessible here. Auction theory uses very tough mathematics to grind out results. But micro theorists also work hard on the intuition for their work. As an example, the results from Mr Klemperer’s auction can be set out in a simple graphical format, see (here). This means non-specialists (like central bank governors) can access it easily, making it much more useful in policy settings. In macroeconomics, the opposite seems to be true: the maths is actually easier, but it is just hard enough to exclude non-specialists, and this shields models from popular scrutiny.

Micro has made big recent developments in much more familiar areas too, including how we should think about the economics of Facebook, stock exchanges, newspapers and money. These are all platforms or intermediaries that link two types of user (Facebook connects users and advertisers, exchanges connect buyers and sellers). The economics of these platforms has spawned a new branch of micro, first developed by Jean Tirole and Jean Charles-Rochet in the early 2000s, (There is a good introduction by David Evans here).

The big idea is that changing prices in a two-sided market triggers a more complex chain of events that the simple “price up, quantity down” of a regular firm. Consider a local newspaper considering a price hike. A higher price may mean more profit, at the expense of a lower circulation. But the lower readership makes the paper less useful for advertisers, who cut job adverts. That makes the paper less useful for job-searching readers, so the circulation falls again. And so on.

These types of new insight explain why leading academic microeconomics are also top advisers at innovative technology firms. Hal Varian, probably the world’s best known microeconomist is also the top economist at Google; other firms keen to pay for micro advisors are Microsoft (Susan Athey); Amazon (Patrick Bajari) and eBay (Steve Tadelis). Granted, this happens with banks and business-school academics too, but in microeconomics the “real world” experience seems to be nourishing the discipline in a way that is less clear in macro.

A final strength may come from geographic diversity. In micro, while American universities lead the field, there are lots of other world-class hubs too. Mr Tirole and Mr Rochet are based in Toulouse, and Britain is still an excellent place to do micro. Macroeconomics, by comparison, is an all-American affair. Maybe this means a means a more diverse set of ideas about how firms, consumer and markets work are being brought to academic work in micro. Whatever the reason, microeconomists are on the up.

economist

Meet the economists who are making markets work better

ON THE face of it, economics has had a dreadful decade: it offered no prediction of the subprime or euro crises, and only bitter arguments over how to solve them. But alongside these failures, a small group of the world’s top microeconomists are quietly revolutionising the discipline. Working for big technology firms such as Google, Microsoft and eBay, they are changing the way business decisions are made and markets work.

Take, for example, the challenge of keeping costs down. An important input for a company like Yahoo! is internet bandwidth, which is bought at group level and distributed via an internal market. Demand for bandwidth is quite lumpy, with peaks and troughs at different times of the day. This creates a problem: because spikes in demand must be met, firms run with costly spare capacity much of the time.

This was one of the first questions that Preston McAfee, a former California Institute of Technology professor, looked at when he arrived at Yahoo! in 2007. Mr McAfee, who now works for Google, found that uses of bandwidth fall into two categories: urgent (displaying a web page) and delayable (backups and archiving). He showed how a two-part tariff (high prices when demand peaks, low ones otherwise) could shift less time-sensitive tasks to night-time, allowing Yahoo! to use costly bandwidth more efficiently.

The solution—two types of task, two prices—has intuitive appeal. But economists’ ideas on how to design markets can seem puzzling at first. One example is the question of how much detail an online car auctioneer should reveal about the condition of the vehicles on offer. Common sense would suggest some information—a car’s age and mileage—is essential, but that total transparency about other things (precise details on subpar paintwork) might deter buyers, lowering the auctioneer’s commissions. Academic theory suggests otherwise: in some types of auction more information always raises revenues.

To test the idea, Steve Tadelis of the University of California at Berkeley (now also working for eBay) and Florian Zettelmeyer of Northwestern University set up a trial, randomly splitting 8,000 cars into two groups. The first group were auctioned with standard information, including age and mileage. The second had a detailed report on the car’s paintwork. The results were striking: cars in the second group had better chances of a sale and sold for higher prices. This effect was most pronounced for cars in poorer condition: the probability of a sale rose by 23%, with prices up by 5%. The extra information meant that buyers were able to spot the type of car they wanted. Competition for cars rose, even the scruffier ones.

But more information is not always better. Studies show that shoppers overwhelmed by choice may simply walk away. Mr Tadelis tested whether it would be better to tailor eBay’s auctions to users’ experience level. The options for new users were narrowed, by removing sellers who are more difficult to assess (for example those who had less-than-perfect feedback on things like shipping times). When new users had a simpler list of sellers to choose from, the number of successful auctions rose and buyers were more likely to use eBay again. Tailoring the market meant gains for buyers, sellers and eBay.

The desire to use theory to challenge conventional thinking is one reason economists are valuable to firms, says Susan Athey, of Stanford University and Microsoft. When Ms Athey arrived at the software giant in 2007 it faced what was seen as an unavoidable trade-off: online advertising was good for revenues, but too much would deter users. If advertisers gained, users would lose. But economic theory challenges this, showing that if firms are dealing with two groups (advertisers and users, say), making one better off often benefits the other too.

Ms Athey and Microsoft’s computer scientists put that theory to work. One idea was to toughen the algorithm that determines whether an ad is shown. This means ads are displayed fewer times, so advertisers lose out in the short-term. But in the longer run, other forces come into play. More relevant ads improve the user experience, so user numbers rise. And better-targeted ads mean more users click on the advert, even if it is shown less often. Empirical evidence showed that although advertisers would respond only after some time, the eventual gain was worth the wait. Microsoft made the change.

Microeconomists have their sights on problems outside their home turf too. At the moment the policies picked by central banks and finance ministries are based on old news, since things like GDP, inflation and unemployment are measured with long lags. A team at Google headed by its chief economist, Hal Varian, is using search-engine data to provide more timely measures. Search terms like “job”, “benefits” and “solitaire” are closely correlated with unemployment claims (see chart). These types of relationship help construct new indexes that offer a real-time picture of the economy. If policymakers start to use these in a systematic way, their decisions could be based on how the economy looked yesterday, rather than months ago.

economist

UN report warns of second recession on EU, US conditions

The United Nations has lowered global economic growth forecast for the coming two years even as it warned of a new global recession due to the US fiscal cliff situation and EU debt crisis. 

It also said inflationary pressures and large fiscal deficit will limit the scope for policy stimulus in India. 

The UN’s ‘World Economic Situation and Prospects 2013’ report released yesterday said growth of the world economy has weakened considerably during 2012 and is expected to remain “subdued” in 2013 and 2014. 

The global economy is expected to grow at 2.4 per cent in 2013 and 3.2 per cent in 2014, a downgrade from the UN’s forecast six months ago when the world body had predicted a 2.7 per cent growth for 2013 and 3.9 per cent for the year after. 

Growth in India, China

Asia’s growth engines, China and India, have also shifted into “lower gear’’.

India, which had grown at 6.9 per cent in 2011, will see its growth drop significantly to 5.5 per cent in 2012. The growth rate is expected to pick up pace in 2013 when the Indian economy is forecast to grow by 6.1 per cent and 6.5 per cent in 2014, the report said. 

“Both China and India face a number of structural challenges hampering growth. Given persistent inflationary pressures and large fiscal deficits, the scope for policy stimulus in India and other South Asian countries is limited,” the report added. 

GDP growth in South Asia is expected to average five per cent in 2013, up from 4.4 per cent of 2012, led by a moderate recovery of India’s economy but still well below potential, the report added.

Weaknesses in the major developed economies such as US and Europe are at the root of the global economic slowdown, it said. 

Jobs crisis

The UN report warned that the pace of growth in the global economy would be far from sufficient to overcome the continued jobs crisis that many countries are still facing.

“With existing policies and growth trends, it may take at least another five years for Europe and the US to make up for the job losses caused by the Great Recession of 2008-2009,” it said. 

Global recession

“A worsening of the euro area crisis, the ‘fiscal cliff’ in the United States and a hard landing in China could cause a new global recession. Each of these risks could cause global output losses of between one and three per cent,” UN’s team leader for the report Rob Vos said. 

Major developed economies, particularly those in Europe, are trapped in a vicious cycle of high unemployment, financial sector fragility, heightened sovereign risks, fiscal austerity and low growth, the report said. 

Several European economies and the euro zone as a whole are already in recession, and euro zone unemployment increased further to a record high of almost 12 per cent this year.

According to the United Nations forecast, the euro area economy is expected to grow by only 0.3 per cent in 2013 and 1.4 per cent in 2014, a feeble recovery from the 0.5 per cent decline in 2012.