Tuesday, March 17, 2009

Economic Recovery 2009 2010

Readers Question: I've recently started doing a piece of research on what the first signs of economic recovery could be (what to look out for in other words), following the current slump. Unfortunately (and perhaps predictably) there doesn't appear to be much commentary on this subject. I think a lot of "experts" are reluctant to stick their necks out at the moment. And after the fuss surrounding Baroness Vadera's "green shoots" comment, that isn't surprising. However I wondered if, from a strict economic viewpoint, there might be some predictable indicators that have in the past suggested the worse was over, and the recovery was beginning.
  • Inflation rising (sign of stimulus packages working?) perhaps?
  • Or maybe house prices stabilising?
Many commentators failed to predict the recession and then failed to predict the depth of the recession. There is a sense that this recession keeps being worse than feared - so as you mention there is a reluctance to start predicting a recovery. But, given current data there is such a negative momentum in the economy that, at best, it will take time to materialise.

The most important data will be seeing positive economic growth. Everyone will breath a sigh of relief to see and end to the plunging output data.

Another key factor will be the banking sector. When bank lending returns to a sense of normal conditions, it will represent a big step in the right direction. Ben Bernacke has recently suggested there are positive signs in this direction. E.g. with citigroup and Merryl Lynch both reporting they were returning to profitability. This is a sign they may start to lend more - without requiring government spending. He suggests because of this development "We'll see the recession coming to an end probably this year," [Guardian link] However, he also warns about the lack of political will to effectively deal with banking problems.

More difficult will be stability in the housing Market. Falling House prices depress consumer spending, consumer wealth and consumer confidence. Any recovery during a period of falling house prices will be tentative at best. This is especially true in the UK where housing makes up a large % of consumer wealth. A sustained period of rising house prices would be great for the economy. However, that may take much longer to occur. In the last housing crash house prices fell for about 4 years. We will hopefully have an economic recovery before waiting for housing market to recover.

False Dawns.

There is also a danger that at the first signs of recovery, the brakes may be slammed on again. Previous growth was based on rising house prices, low savings, high debt. These conditions will not return. There is every danger that any recovery may only be fleeting and we could enter into a double dip recession.

For example, many are concerned that the economic stimulus packages are causing an unwarranted rise in National Debt. Therefore at first chance of recovery governments may put up taxes and cut spending. This could plunge economy into recession again. (e.g. like Roosevelt's deficit reduction budget in 1937, stopped the recovery from the Great Depression. (see article: Life Without Bubbles by Paul Krugman)

Lagging Data

Even if we see a return to positive growth, we are likely to experience a long period of high unemployment. Therefore, although the statistics may show a recovery, the reality is that many may feel we are still in recession. I would imagine unemployment will rise to 3 million in the UK. After the 1981 recession it took several years for this figure to fall.

Inflation.

Deflation or very low inflation is definitely a symptom of economic recession. A more positive inflation is a guide the economy may be recovering. But, it is a limited guide to economic recovery.

No comments: