Economic prophets of doom seen as overly pessimistic

If some of the world’s leading economists are to be believed, the end of the global economy is nigh.

Nobel prize-winning Paul Krugman recently warned of outright depression, blaming policymakers in withdrawing economic stimulus too soon. While Robert Prechter, a prominent technical analyst, has forecast the benchmark U.S. stock market could slump to below 1,000, from just above 10,000 today.

Policymakers, including those here in Canada, say economies are still recovering, though they concede the pace has become increasingly uneven.

So who’s to be believed? Despite the headlines generated by the prophets of doom, the consensus view is probably somewhere in the middle.

BMO Capital Markets Economist Michael Gregory said the current slowdown in growth is only to be expected at this stage in an economic recovery.

“Canada has been growing at 5% to 6%, so if we drop back to 2% to 3% it appears we have slowed down quite a bit,” he said. “That doesn’t mean we’re heading into a double-dip recession.”

Massive stimulus spending by governments around the world helped drag economies out of the worst slump in the post-Second World War era. Recently however, some economists have begun to question whether the recovery can be sustained as European governments tighten their belts to reduce huge deficits threatening to nip growth in the bud.

Data from the U.S. has also raised alarm bells, with the housing market still struggling and little sign companies are beginning to hire again to reduce the jobless rate from close to 10%.

“There are legitimate concerns out there, but that assumes there will be no response from policymakers,” Gregory said.

Another alarm bell has been signs the Chinese economy is slowing. Strong demand from emerging markets, especially China, has helped offset the slump in the U.S. and Europe and is fuelling commodity prices.

HSBC’s Emerging Market Index fell to 55.8 in the second quarter, from 57.4 in the first, as demand for exports from the U.S. and Europe fell. A reading above 50 indicates growth.

The biggest slowdowns were seen in China and Brazil, while Russia and India were still booming.

“The world as a whole isn’t seeing the type of turbo-charged recovery everyone was hoping for,” HSBC Chief Economist Stephen King said on a conference call.

“The pace of recovery is softer than it was at the end of last year, but it’s still pretty strong,” he said, referring to emerging markets.

While exports have seen a decline, the domestic services industry and employment levels have improved, he said.

The International Monetary Fund on Thursday raised its global growth forecast for 2010 to 4.6% from an April forecast of 4.2%. However its outlook was mixed, with Chief Economist Olivier Blanchard warning the risks have “risen sharply.”