The World Economy: Headed North

The global recession is over. Pro or con?

Pro: Positive Indicators Prevail

We believe that the U.S. and global recessions are over and that sustained economic recoveries have begun, both in the U.S. and worldwide.

We believe that: (1) most policy authorities worldwide are "all-in" with powerfully stimulative policy, led by the U.S. and China, (2) the severe inventory liquidation in the U.S. is about to slow, and (3) there has been a major drop in the equity cost of capital and the debt cost of capital for most corporations, fostering corporate deleveraging via refinancing as a substitute for further downsizing.

The cyclical transition from the Great Recession to economic expansion is better understood as the exhaustion of severe weakness in residential construction, auto sales, and production, and inventory liquidation rather than the sum of new sources of strength.

We expect the expansion to be sustainable, given the substantial easing of the credit crunch that has already occurred. Different aspects of the economy should improve at a different pace. Industrial production is likely to rebound immediately as the severe pace of inventory liquidation eases. In contrast, the labor market recovery is likely to be slow, with the peak in the unemployment rate likely to lag by about three quarters. But that is the normal cyclical pattern.

Con: Incomes and Credit Still Spell Bad News

Although heartened by growth in the second quarter in Germany, Japan, and France (and the past year in China) as well as signs that the U.S. and Britain could be growing this quarter, it is too early to call an end to the "Great Recession" while there is still a credit crunch and deleveraging of the balance sheets of firms and households. Assuming the worst is behind us, global economic growth is not expected this year and is forecast to amount to around 3% in 2010, which would be considered a recession because the world needs to grow by more than that in order for income per head to increase due to population growth.

This is put best by Paul Krugman: We are in economic purgatory even if output stops falling. With a 5% to 8% output gap (between actual and potential output) in major economies, we could be in for several years of being poorer until the level of income recovers. The IMF expects that there won’t be a full recovery for another six years, so that means 2015.

And this is the best-case scenario. That is, no "double dip" recession (which can readily happen as industrial output is now falling in the euro zone, and unemployment is rising everywhere) or even worse, the advent of a "recession within a recession," which was the case in the Great Depression following the last systemic banking crisis.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

Squeezebox

There is an article elsewhere in BusinessWeek that states that the bankruptcies have barely begun. As companies go belly up, they discharge workers. Unemployment benefits don't completely replace lost income, and insecure customers save more than they spend. The problem with this so-called recovery is that people who get laid off can't find replacement jobs.

diligentdave

Nassim Nicholas Taleb, Ambrose Evans-Pritchard, and Dmitry Orlov, among a number of others, have repeatedly pointed out such things that we have even more debt as of 2009 than we had in 2008, that the real estate markets' collapse is far from over, that the debt levels of households, businesses, and governments on both an absolute and also relative scales make the situation at the beginning of the (first) "Great Depression" of the 1930's appear "good" in comparison.

I would also argue, as Taleb has done, that there is no slack in markets and economies. High debt overall, growing non-replacement fertility rates in both developed nations, and an increasing amount of lowering & subreplacement rates in Developing nations. All of this, combined with "over-optimization" (i.e., too many large corporate entities, like banks; lack of robustness everywhere; too many dual income households --Elizabeth Warren, Harvard Economics Professor, authored a book about how dual income homes have made things far worse, looking from both a micro-economic, as well as macro-economic view, vis-a-vis the mostly single-income households of a generation or two ago; Dmitry Orlov has talked about how "just-in-time" (JIT) delivery may be good in one circumstance, and extremely bad in another--in the case of social, including economic collapse--which is what we are going through). All of these factors lend themselves, in my opinion, to a far worse scenario than that which those who think we are exiting the 'great recession' think. The V-shape stock market we are now experiencing has happened on the DOW three times previously. Two of those times was in the early 1930s

"Buyer Beware"! Anyone "buying" the notion that we are headed out of the economic depression we've been sinking into in the last 2 or more years will suffer, I predict, soon enough, with buyers remorse big time.

Anish John

Headed North? It should be South in this century.

Dr Moon

This recession should be over and done with by now, but thanks to the Community Organizer in Chief he's mangaged to prolong the recession and turn it into a major problem. By taking $2 trillion dollars from the private sector that would have been used for job growth and new business ventures and giving it to the his government friends, he's added to the debt and put a stop to any new private sector growth for another year or more. The only new government jobs are short-term construction jobs like highways.

Dyo

Why north and south? Shouldn't it be west to east? Looking at the subprime in the west, most of those who stand out in the crisis are more in the east area.

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