Michael Mussa

Former IMF chief economist Michael Mussa says in a report to be released Thursday that global growth will reach 4.2% in 2010.

Mussa was in charge of economic research at the International Monetary Fund from 1991 to 2001 and is now based at the Peterson Institute for International Economics, a Washington DC think-tank. His global forecast is being released about a week before the IMF will publish its World Economic Outlook. The Wall Street Journal says comments from IMF officials indicate the Fund will predict global growth of about 2.9% in 2010

Mussa estimates that the US will grow 4.0% in 2010, Japan 2.5%, the Eurozone 2.3%, Germany 2.2%, China 9.0%, and India 7.5%.

The Journal says Mussa argues that Republican White Houses, Democratic White Houses, Federal Reserve economists, and private prognosticators alike routinely underestimate rebounds. He says there’s a simple historical rule: sharp recessions generally produce sharp recoveries.

But he does allow that this recovery may not be as steep as past ones. He figures US growth over the next 18 months growth will be at only about two-thirds the pace of typical US recoveries from sharp recessions.

Specifically, he sees inventory rebuilding, a pick up in car sales from depressed levels, residential investment and a faster dip in unemployment than many forecasters predict. He expects unemployment to peak at slightly below 10% this year, and fall below 9% by the end of 2010.

The Journal says his colleague at Peterson, China expert Nick Lardy, is similarly bullish. He says the 9% growth prediction for China is warranted because of China’s sustained stimulus spending and also because China is starting to rely more on domestic growth. Spending on social services is growing rapidly, he says, reducing the need for Chinese to save as much as they do, and household consumption is picking up.

Chinese consumers aren’t burdened by debt loads remotely similar to Americans. Indeed, he expects Chinese households to start borrowing more and spending more, buoyed by cheap credit. He calls it “releveraging,” as compared to the depressing “deleveraging” facing American households who are saving more to pay off debt in an uncertain times.

Michael Mussa noting that the global economy is heading out of its slump, says that the G-20 summit next week in Pittsburgh, should also deal with an “exit strategy” from stimulus programs and the future of global financial regulation:

Interview Transcript: A Pat on the Back at Pittsburgh?

On Wednesday, US homebuilder sentiment rose in September to its highest level since May 2008, the National Association of Home Builders said, supporting the view that the housing market is stabilising.

The NAHB/Wells Fargo Housing Market index climbed to 19 from 18 in August.

The sentiment index had fallen to a record low of 8 in January and has since steadily climbed. Readings below 50, however, mean more builders view market conditions as poor than favorable.

"Today's report indicates that builders are starting to see some glimmers of light at the end of the tunnel in terms of improving sales activity,"NAHB chief economist David Crowe said in a statement.

William White, formerly chief economist of the Bank for International Settlements writes in the Financial Times today: "The current Keynesian mindset rightly observes that we have a shortage of aggregate demand. It then concludes that demand stimulus, from whatever quarter, is to be welcomed. However, in addition to the undergrowth problem on the demand side, we can also have an undergrowth problem on the supply side. This was the core of Friedrich Hayek’s position when he debated Keynes in the early 1930s.

In response to demand stimulus over recent decades, with investors implicitly assuming that the future would be like the recent past, there has been a massive increase in supply potential in many industries. The upshot is that many of them are now too big and must be wound down. This applies to automobile production, banking services, construction, many parts of the transport and wholesale distribution industries, and often retail distribution as well. Similarly, many countries that relied heavily on exports as a growth strategy are now geared up to provide goods and services to heavily indebted countries that no longer have the will or the means to buy them."