Recovery in the offing, timing debatable

By Steven Lamb | August 24, 2009 | Last updated on August 24, 2009
3 min read

What was initially dubbed “The Great Recession” appears to be drawing to a close, about nine months after it was first recognized. The U.S. economic downturn, which cascaded around the globe, officially began in December 2007, but that start date was only announced a year later.

It has been the longest and deepest recession since the Second World War, with 2.3% trimmed from the world real GDP in 2009. But, according to a forecast by IHS Global Insight, 2010 will see real GDP grow by 2.4%, accelerating to 3.4% in 2011.

The global contraction stabilized in the spring as declines in the U.S. and western Europe slowed and emerging Asian economies posted strong growth.

“Massive inventory liquidations in the first half of 2009 have set the stage for rebounds in global production and trade,” wrote IHS Global Insight’s chief economist, Nariman Behravesh, and economist Sara Johnson. “Financial markets have stabilized, and investors’ appetite for risk is returning, although credit will remain relatively tight as banks rebuild their capital positions.”

Recovery will not be balanced across the world, however, and the think tank says major economies in western and emerging Europe will lag the rapid growth of emerging Asian markets.

In both Europe and the U.S., consumers are expected to tackle their own debt problems before rebuilding their assets through savings, and this reluctance to invest capital could pose a risk to growth.

“There is a risk that the recovery in some countries could lose steam in the next couple of quarters,” wrote Behravesh and Johnson. “The fiscal stimulus measures in many countries are temporary. Once these effects wear off, sustained recovery will depend on a rebound in consumer spending, housing and business fixed investment in the key economies of the world.”

The recession may rear its head again. New York University economics professor Nouriel Roubini has warned of a “double-dip” recession, suggesting that the current upswing is merely the eye of the economic hurricane.

In an opinion piece in the Financial Times, Roubini admits that a recovery is already underway in the emerging markets and a handful of developed economies (notably Australia, Germany, France and Japan). But for the U.S., Britain and the rest of the eurozone economies, he says the economy will bottom out in the second half of 2009. There will not even be a whiff of recovery until 2010, at the earliest.

Read: The risk of a double-dip recession is rising.

That recovery, he says, “will be U-shaped, anemic and below trend for at least a couple of years, after a couple of quarters of rapid growth driven by the restocking of inventories and a recovery of production from near-depression levels.”

The problems with the U.S. banking system have not been solved, he points out; they’ve simply been shifted onto the balance sheet of the government in the short term and onto the backs of the taxpayers in the long term.

These same taxpayers are largely still in debt — struggling to de-leverage their household balance sheets — and, in many cases, still losing their jobs.

“If [policy-makers] take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation,” Roubini writes. “But if they maintain large budget deficits, bond market vigilantes will punish policy-makers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.”

In Canada, consumers are facing higher prices on gasoline and food, which drove June’s retail spending higher by 1.0%, to $34.4 billion, according to Statistics Canada. In terms of actual sales volume, the increase was just 0.4%.

Read: Statistics Canada’s retail sales report

Related Articles On …


Steven Lamb