'Getting worse more slowly'

THE GLOBAL economy is “stabilising”, but could still face into at least a decade of stagnation, according to Prof Paul Krugman.

Addressing a Merrion Stockbrokers forum in Dublin, Prof Krugman said that while the world was in “one hell of a crisis”, the situation appeared to be settling. He likened the first year of the current crisis to the first year of the Great Depression but said the second year would not maintain this pattern.

“We do appear to have stepped back a couple of paces from the abyss,” said Prof Krugman.

The Nobel Prize-winning academic was not however wholly optimistic, noting that a recovery was not in place. Things are getting worse more slowly,” said Prof Krugman, pointing to slightly encouraging recent data such as the US services sector index.

There is “not a hint” of a V- shaped recession and there are “no green shoots” outside, perhaps, of the UK, which had benefited from an effective currency devaluation. “It’s turning from a nosedive into a glide downwards,” he said.

Prof Krugman has consistently raised the possibility that this recession could turn into the kind of “lost decade” experienced by Japan in the 1990s, whereby the economy stops collapsing but does not recover for a lengthy period.

“I don’t see any reason why this should end in a decade,” he said, suggesting significant economic pain was yet to emerge from the global commercial property sector. “It looks like it’s going to be worse than anybody imagined.”

Prof Krugman predicted smaller banks around the world were “about to hit big losses”, while the economic situation in eastern Europe became “grimmer”. He said the dollar still had some space to decline in value.