News Room - Business/Economics

Posted on 10 Dec 2008

World economy could be depressed beyond 2011: Nobel economist

The world economy will likely feel the impact of the global financial turmoil for another three years at least, the 2008 winner of the Nobel economics prize Paul Krugman said Monday.

 

"We could easily be talking about a world economy that is depressed into 2011 and even beyond," the Princeton University professor and New York Times columnist told reporters in Stockholm, where he will receive his Nobel prize this week.

 

Paul Krugman of the U.S., winner of the Nobel Prize in Economics for 2008, speaks at a news conference after his Nobel lecture at Stockholm University in Stockholm December 8, 2008. (Reuters)

 

"The scenario I fear is that we'll see for the whole world the equivalent of Japan's lost decade in the 1990s, that we'll see a world of zero interest rates and inflation and no sign of recovery and it will just go on for a very, very extended period," he said.

 

"On top of that, we'll have a series of extremely severe crises in particular countries in trouble," he predicted, pointing out that "we certainly see the roots of ... Argentina- or Indonesia-style crises ... particularly in the European periphery."

 

As for the United States, Krugman, who has previously said that a stimulus plan of at least four% of the US gross domestic product is needed next year, said Monday that amount might not be enough.

 

"If you're serious about the size of the hole that needs to be filled, that's actually modest," he said, stressing that that amount "is not enough to prevent a further decline in the economy. It's enough to prevent a sharp decline."

 

The falling US housing market, which triggered the global financial crisis, will probably continue to weaken, he said, pointing out that recent estimates show "we have another 10 to 15% to go."

 

Krugman, who won the Nobel prize for his work on the impact of free trade and globalisation, said Washington should not hesitate to spend on infrastructure that would provide long-term benefit to the country, even if it means running up a high deficit in the short term.

 

"We're probably in the US going to run a deficit of seven or eight% of GDP next year. That's clearly not something you can do indefinitely," he said.

 

"If it's two years of massive stimulus and massive debts, that's okay. If it's two years of that, and no sign that anything is getting better then I start to worry," he added.

 

Krugman will receive his Nobel gold medal and diploma along with 10 million Swedish kronor (1.2 million dollars, 929,000 euros) at a formal prize ceremony in Stockholm on December 10.