Monday, 10 August 2009

Is the end of the recession nigh?

Paul Sweeney: Is the recession beginning to end? It is far too soon to say. It has been the worst recession in living memory, and Ireland is one of the worst economic performers, with the economy shrinking by a staggering 10.3% in 2009. Compare this to the Euro area of – 4.4%, UK 3.7%, US -2.7%, France at -2.9%. Then there are the other very poor performers, with Germany at -6% and Russian at -5%.

Over east, Japan is shrinking by -6.1%, while Singapore is registering an even bigger fall in GDP of -6.8%. Korea is at -5%, and Thailand at -4.5%. The Celtic Tiger is falling with the new and the old Asian Tigers!

The very few economies which are growing include China at (a now reduced) +7.2%, India at +5.5%, Indonesia at +2.5%, Pakistan at +1.3% and Egypt at +4%. Virtually every other economy in the world is shrinking in size this year. For 2010, forecasts are more optimistic, with growth in the vast majority of economies, albeit low growth. This excludes Ireland in 2010.

Conventional wisdom among economists is that large falls in growth mean the recession will be long, and that when the recovery happens, it will be slow. Yet the economist Paul Ormerod argues “very few recessions last longer than two years. And most recoveries, once they start, are strong.” He argues that that, as late as the autumn of 2008, economic forecasters in general were far too optimistic about 2009. He asks: are these same forecasters now too pessimistic about recovery? He argues that “the historical evidence reveals a typical pattern of recession and recovery that suggests this may be so.”

Ormerod says that “since the late 19th century, there have been 255 recessions in western economies. Of these, 164 have lasted just one year and only 32 have lasted for more than two years. In other words, two-thirds of recessions last a single year, and only one in eight lasts more than two years. If we strip out the peculiar circumstances at the end of the two world wars, 70 per cent of all recessions last just one year.” He also says that the “pattern of duration is virtually identical regardless of the size of the initial shock.” He says that even with a fall in growth of 6 per cent, 70 per cent of recessions have lasted just one year.
Ormerod, who is author of Why Most Things Fail and the Death of Economics (a critique of orthodox economics), says that recovery was rapid even after the Great Depression, and he argues that it will be again this time because “capitalism seems to be a very resilient beast”.

However, he is probably optimistic, as are the economic forecasters arguing for the rapid turnaround and resumption of growth next year. This recession is very different from previous ones, especially the Great Depression. With globalisation, the world is greatly interlinked, as the negative growth figures almost everywhere demonstrate. This is a really synchronised recession. Few countries are importing so much that they can pull out other countries with export growth (a line argued in Ireland by the Wages Cuts Chorus who equate wage cuts with increased competitiveness!). Secondly, this recession differs in that it was caused by the collapse of what was, in essence, a corrupt and poorly supervised financial sector. This sector had come to dominate the more productive economy, with the approval of governments.

So this recession, generated by the deep Financial Crisis (remember it was initially called the “Credit Crunch” by journalists and apologists), and which is globally synchronised, will be particularly difficult to arise from. But in the meantime, we hope that Ormerod may be right.

The financial crisis is on the way to be solved. Stock markets are recovering, the taxpayer is bailing out the banks (and builders, in Ireland), liquidity is returning slowly to markets, and the extreme uncertainty in markets has ended. The state rescued the (self-regulating!) market. The OECD and IMF are revising upwards their projections for the first time in a couple of years.

So we probably have passed the turning point, the absolute bottom. But we are a long way from recovery, from the emergence of the “Green Shoots”. In Ireland, our bankers, builders, government, and the so-called financial regulator screwed up particularly badly, ill-advised or not advised by most economists. We really ruined a very prolonged boom with a deep bust, which could have been so much less than a fall of 14%+ in GDP from peak to trough. It will be late 2010 before the shoots even begin to arise here. In the meantime, unemployment will rise and will take time to shift down again.

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