Liam Dann: Stimulate - or fix deficits? Ask the octopus...

Should central governments keep pouring on the stimulus or start fixing their deficits, at the risk of creating a double-dip recession?

Clearly this is a question for Paul the Octopus because none of the economic experts seems able to agree.

Paul the German cephalopod has become an overnight celebrity for accurately picking the winner for all six of Germany's World Cup games.

His final pick (that Spain would win the semifinal) was always going to be an unpopular call in his home country but he made it with a fortitude that will have endeared him to central bank governors the world over.

Now some angry punters want him to be turned into paella or thrown on the barbecue. That kind of crowd reaction will have a familiar ring to Reserve Bank Governor Alan Bollard.

But really Bollard ought to think about getting an octopus because the global economy is now in such uncharted waters that regular human thinking is no longer providing much clarity.

In New Zealand the debate reached fever pitch after Tuesday's NZIER Quarterly Survey of Business Opinion was gloomier than expected.

Suggestions that the recovery had stalled and that Bollard should stop raising rates went down like a Uruguayan hand ball with some economists.

In a debate on National Radio, Westpac's Brendan O'Donovan was lucky not to get a yellow carded for describing comments by BERL's Dr Ganesh Nana as "absolutely moronic".

Essentially the pair were at odds over just how bad things are out there in the real world. There's only one reassuring answer to that question: not as bad as they could be.

In Britain and the United States they are having much the same debate, albeit with much uglier numbers.

On both sides of the Atlantic commentators have started talking about the Great Depression again.

First up was Nobel Prize winning economist Paul Krugman in the New York Times.

"We are now, I fear, in the early stages of a third depression," were the words that grabbed headlines.

Krugman was making the point that in previous US depressions - in the 1870s and 1930s - the economy and markets fluctuated wildly without ever holding on to gains and breaking into sustainable growth.

In other words the economic picture then might not have looked too different than it does now.

On that basis Krugman believes it would be foolhardy to pull back on Government stimulus and in fact suggests more should be spent.

In Britain's Daily Telegraph, Ambrose Evans Pritchard also made a compelling comparison between the US economies of 2010 and 1932.

He argued that - after 18 months of government spending, money printing and holding of interest rates at zero - for the US to be still shedding jobs is a sign that it is in depression.

So as the cold rain howled in from the south again this week it all looked pretty grim.

But then on Thursday an IMF report suggested it thinks the global economy is recovering faster than expected. Maybe that just shows the value of starting with low expectations.

But markets worldwide breathed a collective sigh of relief. Finally somebody had something nice to say about the economy. The IMF has revised its global growth forecast up from 4.2 per cent to 4.6 per cent.

That sounds pretty good and most of that growth is expected to come out of Asia, China and by association Australasia.

The news wasn't so good for Europe where the IMF highlighted the, still, very serious risks around sovereign debt. And Britain didn't fair much better than its national football team - its growth prospects were revised down.

That's because the Tory coalition Government has decided to tackle the debt mountain head on.

Paul Krugman doesn't approve but British Prime Minister David Cameron looks set to risk a double-dip recession in the early part of his electoral term by slashing spending. He is hoping to get Government debt under control quickly so investors take a more favourable view of the British economy and help it return to a more sustainable growth path.

There's no doubt Western nations - including us - need to pay off debt. But how fast should we go about it? In New Zealand we have a wider window of opportunity compared with many countries. That's allowed our Government to hedge its bets - bit of stimulus here, a few cutbacks there.

But the choices aren't going to get any easier over the coming years. Perhaps the progress of the US and UK will provide some clues. If not, it'll be time to reach for the octopus.


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