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.