Sunday, 14 June 2009

Green shoots, slugs and the banking sector

Paul Sweeney: I’m sceptical of all the talk around “Green Shoots.” As a bit of a gardener, my green shoots this year have been eaten by slugs. That’s why I believe that, unless we put up barriers to the slugs in the enterprise sector in Ireland, green shoots wont take deep roots. All our endeavours will, in the long run, be in vain.

The Financial Times headline on Friday, June 12th shouted about “Green Shoots”. It said that the pound surged to its highest level this year against major currencies. It was boosted by increased “investor confidence that the British economy is on the road to recovery.”

Sterling's strength “comes as City analysts are tearing up their forecasts of a prolonged recession, increasingly convinced that tentative signs of economic "green shoots" show the worst of the downturn is past,” the headline FT article said.
“Green shoots” is the term used to indicate signs of economic recovery during a recession. Its overuse by desperate optimists is getting a bit tiresome. It was first used by Norman Lamont, Chancellor of the Exchequer in the United Kingdom, during the 1991 Recession. Lamont got it wrong!

This week the pound rose 2.8 per cent against the currencies of the UK’s trading partners and was 14 per cent higher than where it started the year. This was its biggest gain in a single week since January, “demonstrating optimism around the UK's possible prospects for recovery.”

"It seems increasingly likely that the UK recession will end soon," said Michael Saunders of Citi, previously one of the most gloomy forecasters, the FT said.
Japan also revised its first-quarter GDP fall to a 3.8 per cent contraction, slightly better than the estimate of 4 per cent. Also Australia reported better-than-expected jobs figures. South Korea and New Zealand left interest rates unchanged, pointing to positive signs in their economies, also according to the FT
Commodities have been rising recent months, but it should be noted that they are way down on a year ago when they were at a major peak. Crude oil reached an eight-month high this week because it seemed that investors continued to speculate on an economic upturn. Oil has doubled in price in six months, but at the same time is half what it was a year ago. Metals were up 50 per cent from their base and agricultural commodities are up 34.3 per cent from their low.

It may be that demand is now exceeding supply. Manufacturers did cut production last year, with less demand and or because of the crisis meant poor access to loans. The FT admitted it was basing it headline on “anecdotal signs of recovery.” It claimed that carmakers are restarting production lines and hiring staff and to a few other positive indicators.

However, it could be that we are just at the beginning of an inventories/stocks recovery. As the business cycle turns, when companies which may have cut too much during the financial crisis last year and producing again. If it is just a re-stocking, then don’t expect the green shoots to take root.

Being a bit of pessimist as yet, one must note that a sudden rise in commodities prices could stifle the economic recovery. First, higher oil prices depress economic activity. Second, they create inflation, and help to drive inflationary expectations.

Last week the stockbroker economists hogged the news in the compliant business sections of the newspapers on the fall in Irish inflation, asserting also that wages are also falling… which the evidence so far shows is an untruth. But a huge proportion in the CPI was the fall in interest rates, a fall of 42% in the year and energy products which fell by over 10%. (interest rates have a weighting of 7% and energy of 8% in the Irish CPI).

Now interest rates will not fall any more and oil is rising ... so expect inflation to rise. And the recent rise in Sterling, if sustained, will push up prices too.
Further, on average, contrary to the opinions of Garret Fitzgerald and the bevy of stockbroker economists, nominal wages are not falling, but appear to be standing still, though the evidence is yet to be produced by the CSO. Last year, wages rose by 4.6% per hour, according to CSO data last week. So one cant be so sure that another green shoot is that workers’ wages are falling in nominal terms and so costs will fall. Further, most commentators leave out the business elite and professionals classes contributing (non employees who make up a good one-third of the remuneration bill) to the deflation of Ireland’s high costs. Could there possibly be a bias with economists / commentators?

On green shoots - all of my lettuce, which appeared this year as green shoots, disappeared. The exception was in a tray, in the greenhouse. Transplanted out, all the lettuce green shoots were gone the next day, repeatedly. SLUGS! The wet weather.
Don’t expect green shoots to root in Ireland till the slugs in the banks, and in other high places, especially in economic areas of the public sector, are effectively dealt with! A spell of dry weather will help in the short run, but a resort to chemicals/barriers may be necessary. This must be in the form of major governance rule changes, including where the corporate / enterprise elite is supervised effectively, with dual board structures, like in Europe.


Michael Taft said...

The green shootists, as you say, take heart in the re-stocking process as well as the fall-off in the rate of decline. This hardly inspires confidence in their optimism. Already, the IMF, the World Bank and prominent economists such as Paul Krugman, are warning of a decade of low-intensity growth - the dreaded L-shape to the recession. Some commentators here are starting to get to grips with this. Whereas the Government projects a return to growth in 2011 of nearly 3% and the ESRI predicts average post-recession growth of nearly 5%, Goodbody is projecting growth at 1%. If the latter is near the truth, this suggests a future of high debt and deficits, high unemployment and a degraded physical and social infrastructure for want of investment. Now throw in the banking crisis. I'm afraid we'll all have to take refuge in your greenhouse, Paul; each to our own tray.

Damian said...

There is an interesting opinion piece by Joseph Stiglitz in this morning's South China Morning Post ( arguing that for all the talk about green shoots, the net result in the US has been an unprecedented extension of the “corporate safety net” with little or no social benefit. This according to Stiglitz is not socialism (or indeed socialism with US characteristics), but rather an extension of the long-standing system of corporate welfarism that has allowed the rich and powerful to turn to the government to help them whenever they can, while needy individuals get little social protection. Moreover he once again highlights the long held suspicion that there is little or no evidence of the supposed societal benefits that would be commensurate with the costs that bailouts and supports have imposed on others.