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Saturday, 29 August 2009

RECESSION ON/OFF - media spin or delusion?

The media is reporting central bankers and top regulators telling us, as in the words of the FT, "economic doctors have given their prognosis: the worst of the Great Recession has passed, but a full recovery will take a while." When the FT (LEX 'owner') refers to "economic doctors" leaving out the word "spin" for drip-dry humour effect - what do they really know? As we know, or should know, government officials avoid predicting recessions for fear that whatever they say becomes self-fulfilling; they believe in confidence factors.
When bankers do so it implies finance has an inside track, a superior map, for knowing where we are in macro-economics. There is no recent evidence to assume that, quite the contrary. Finance is, as we know, short termist, happiest when trading short-run volatilities. Easy for them to jump on latest quarterly figures to claim longer-run turning points. But, the truth is rather otherwise:
1) quarterly figures are not reliable - we have to wait for annual figures
2) there are several world region economic cycles, not one global cycle, however connected, the various main cycles do not move in synch, especially not C.Europe, Japan, and USA/UK.
3) official growth figures (GDP)are provisional and take several quarters to firm up during which they are subject to major revisions.
That said, the global economy did go into negative growth when all was added up together for 2008, but beneath the aggregate total were many disconnections. And there is little doubt that all OECD (developed) economies experienced quarters of negative growth together in the last year. That is unusual; it last happened in the oil shock of the early '70s (oil price hikes in response to Arab/Israeli war). After the shock, countries and regions rebounded to where they had been in their respective cycles before being so rudely interrupted.
This time we also had sharply rising oil prices, but just as potently, or more so, we had the Credit Crunch when much (not all) of global finance panicked, had an anxiety attack, dose of the vapours, seized up, became disorderly, stopped working as hitherto predicted. This was a downward spike in all major economies and many minor ones. The extremely one-sided pattern of world trade died and is being reformed. The USA as the world's major deficit country to which nearly everyone else became a creditor couldn't go on as before and is now acting as a slower steam engine, putting less coal and water into the boiler, when pulling the train of global activity behind it. It is also like a motorway pile-up; USA vehicles at the front stop suddenly but it takes a while before all other vehicles behind slow-up, and similarly as the USA gets going again it will take time before those behind get going.
This analogy is however too much one or two dimensional. The world system functions by having major regions acting in countervailing ways to each other. When USA peaks, Europe tends to be down and vice versa, just as the oil price was driven at times 90%by the $/€ exchange rate, and as much more by depressed demand.
What I expect to see when with better hindsight we can look back over the 2005-2012 period is that many economies experienced a temporary shock into recession before recovering back onto the poath they were following before the Credit Crunch shock. Hence I do not expect UK recession to end before 2Q '10 and C.Europe and the Euro Area that have receovered recently into possible positive growth have another recession coming in '11 and '12.
In the week when central bankers met in Jackson Hole, Wyoming, to express optimism, however circumspect (basically to validate each other's responses to the crisis when few others will), curiously the main media comment concerns the future of base rates? There is a theory that still prevails, however discredited by events, that central bank rates drive the credit & economic cycles by acting upon domestic inflation. Many have blamed an over-long period after 2001 of low base-rates for the Asset Bubbles that burst to create the Credit Crunch and that central banks in their monetary price settings focused only on consumer prices and failed to address asset prices (real estate & financial equity). The balance of media opinion seems to be that central banks are likely to err on the side of keeping interest rates lower for longer, necessitated by a longer recovery period, consumer price and continuing asset deflation, and to maintain a wider margin in which traditional banking can internally generate new capital reserves.
A question is how far and how quickly should policy seek to restore asset values to pre-Credit crunch levels? More on this question anon.

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