Economics focus: The teetotallers' hangover

"High saving and low private-sector debt have not shielded Germany and Japan from recession PAUL KRUGMAN, the winner of this year’s Nobel prize in economics, put his finger on something in the 1990s when he identified, and then ridiculed, the notion that a slump is a “necessary punishment” for the excesses of the boom that went before it. The popular idea of recession as purgative—the hangover following an ill-judged binge—has a strong and enduring emotional appeal. It allows distressed consumers in America and Britain, countries with a shared weakness for untrammelled spending and reckless borrowing, to make sense of the unfolding crisis. Recession, they reason, must be a penance for past profligacy. However, such logic is of little use in Germany and Japan, two big and rich countries that did not succumb to the boom’s vices, but are nevertheless facing nasty recessions. Each avoided the credit expansion, consumer frenzy, house-price bubbles and trade deficits indulged in by many of their peers. Both went into the downturn less burdened by private-sector debt and with hefty current-account surpluses (see left-hand chart). Yet prudence has not spared them: both economies contracted in the second and third quarters, and seem set for a further retreat in the current one. The OECD forecasts that Japan’s economy will grow by just 0.5% this year, and will shrink by 0.1% in 2009. It thinks GDP in Germany will fall by 0.8% next year. ..." (2008-12-4)

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