13
May
Has the recession bottomed out?
Analysis
By Steve Schifferes
Economics reporter, BBC News (Tuesday 12th May 2009)
By some measures, the global recession seems to be accelerating,
with unemployment rising and overall economic activity falling. But
there are some signs that the rate of decline is slowing. How
significant is the evidence for a turning point?
There is some cautious optimism around to suggest that the worst
of the rapid decline in world economic output may be over.
Jean-Claude Trichet, the president of the European Central Bank,
said there was a "slowing down in the decrease in GDP", while
certain countries were already reporting a pick-up.
"We are, as far as growth is concerned, around the inflection
point in the cycle," he added.
Meanwhile, the Organisation for Economic Co-operation and
Development (OECD) has suggested that there are "tentative signs
of, at least, a pause in the economic slowdown" in France, Italy,
China and the UK.
These signs are based on its composite leading indicators index
(CLI), which tracks forward-looking economic data and normally
provides advance signals of changes in economic activity.
The CLI for March ticked up by 0.3 points in the UK, although it
was still 5.4 points lower than one year ago, and moved up 1.2
points in France and 0.9 in China.
There were other signs of a tentative recovery in the UK, with
retail sales up by 4.6% like-for-like in April after a strong
Easter, and manufacturing output declining by a smaller amount
(0.1%) in March than any time in the past 13 months.
Meanwhile, the National Institute for Economic and Social
Research said that the rate of decline of GDP had slowed in
April.
There are also signs that housing market activity in the UK is
picking up slightly, with mortgage approvals up 4% and surveyors
reporting increased interest in house purchases.
"The patient has been stabilised and a recovery is imminent,"
said Hetal Mehta, of the Ernst & Young Item club of
forecasters.
Small signs
There have been tentative signs of optimism in other leading
industrial countries, with German business confidence moving above
its low point in the closely-watched Ifo survey, while in the US
consumer confidence recovered from its absolute lows in the last
few weeks.
World stock markets have also recovered from their lows in
March, with the FTSE world equity index up 40% (excluding
Japan).
But there is a need for caution in interpreting these
figures.
In the first place, the evidence for "green shoots of recovery"
is largely based on surveys that track the expectations of
businesses and households, not their actual behaviour.
This may predict future actions. But in most of the real
economy, other, lagging indicators such as unemployment and
manufacturing output are still getting worse.
Rising unemployment, which could reach 9% in the UK, 10% in the
US and 20% in Spain by the end of the year, would have a negative
effect on consumption and the housing market.
Secondly, the signs themselves are only pointing to a less
severe recession, not an actual recovery.
Many of the surveys which make up part of the leading indicators
index are still negative. Although businesses and consumers are
slightly less pessimistic than in previous months, they are still
far from optimistic.
Thirdly, the tentative signs of recovery are not yet very strong
in some of the biggest economies in the world, such as Germany,
Japan and the US, where the OECD leading indicators index is still
pointing towards further weakening.
And conditions are still deteriorating in developing countries,
apart from China.
Without the big economies participating, any recovery next year
is likely to be anaemic.
2010 recovery?
What is looking more likely is that the pace of decline in
economic activity may be slowing.
This is hardly surprising, given the severe drop in economic
output in the main industrial countries since the financial crisis
broke with full force late last year.
In the UK, the economy declined by nearly 4% in just the last
six months, while in the US, the annualised rate has been more than
6% for the last six months.
A continuation of that pace of decline over the next year would
have pushed the world closer to the level of the Great Depression,
when output declined by 25% over three years.
The scale of the intervention by governments, both in
implementing economic stimulus packages and supporting the banking
sector, is only now beginning to affect the economy, and is
certainly having a moderating effect.
However, it still looks fairly inevitable that in 2009, the
world economy will fall into the deepest recession since World War
II.
What is more uncertain is whether the contraction will continue
into 2010, or whether further government intervention will be
needed to produce a real recovery.
If the leading indicators are correct, we may see a modest
return to growth in some countries next year - but not big enough
to return their economies to the level of economic activity before
the recession began.
Financial worries
According to the IMF and many leading economists, the biggest
uncertainty remains the weak state of the financial sector, which
precipitate a further fall in output.
As economist Barry Eichengreen of Berkeley says, "For green
shoots to grow, they need watering - with liquidity from the
banking system, which is not currently able to provide it."
So far, the "stress testing" of major banks in the US - which
identified the need for some $75bn in new capital - has helped to
boost confidence in the financial sector.
The IMF has urged a similar exercise in Europe, but has warned
that there could still be another $3 trillion in losses for the
financial sector as a whole before the crisis is over.
Until these "toxic assets" have been dealt with, it is difficult
to imagine a strong recovery - and even the current increase in
confidence could bottom out.
So while we may have passed the worst of the recession, it is by
no means certain that we have returned to "normal" growth - or even
whether we know what it is.