The Shape of the Recovery by Charles Wilson January 2010
The worst global recession since the 1930s may be over. Led by China, Asia’s emerging economies have revived fastest, with several expanding at annualised rates of more than 10% in the second quarter. A few big rich economies also returned to growth between April and June. Japan’s output rose at an annualised pace of 3.7%, and both Germany and France notched up annualised growth rates of just over 1%. In America the housing market has shown signs of stabilising, the pace of job losses is slowing and the vast majority of forecasters expect output to expand between July and September. Most economies are still a lot smaller than they were a year ago. On a quarterly basis, though, they are turning the corner.
In South Africa the outlook is less rosy. Late to implement monetary easing, and cautious when it started, the SARB has almost certainly prolonged a nasty recession at home. When other Central Banks – in Australia and Norway specifically – are turning hawkish in their announcements and looking for the right time to begin raising rates, there is a very real possibility that the SARB will need to keep lowering rates to counter the ongoing recession and the impact of a strong Rand.
South Africa’s slide into a nasty recession does have a silver lining however – it proves that we are inextricably linked to the world economy. This would suggest that in the same way we followed the rest into recession, we will follow them out (even if we remain behind the curve)...
However, despite the shifting policy stance of certain central banks mentioned above, and the positive response with which equity markets have received the news of better-than-expected consumer confidence and home sales data coming out of the US; the strength and quality of the economic recovery is by no means certain.
While economists and other commentators agree that a global recovery has started (i.e. output has stopped shrinking), they remain divided on what shape the recovery will take. The debate centres around three scenarios: “V”, “U” and “W”. A V-shaped recovery would be vigorous, as pent-up demand is unleashed. A U-shaped one would be feebler and flatter. And in a W-shape, growth would return for a few quarters, only to peter out once more.
Give me a V…
Optimists argue that the scale of the downturn augurs for a strong rebound. America’s deepest post-war recessions, they point out, were followed by vigorous recoveries. In the two years after the slump of 1981-82, for instance, output soared at an average annual rate of almost 6%; and this time round, output has slumped even further, and for longer, than it did in the early 1980s.
…Give me a W…
Pessimists - including the widely respected Nouriel Roubini - think this downturn’s origins favour a weak recovery or a double-dip. Roubini argues that governments and central banks are “damned if they do and damned if they don’t.” If they withdraw stimuli too soon they will be faced with “Stagdeflation” (low growth and deflation) and if they leave them in place they will be faced with “Stagflation” (low growth and inflation)
Another V?
In practice the recovery is likely to lie somewhere in between the “W” and “V” shaped recoveries, i.e. in a “U”. This is because of the equally strong forces that started this recession and which were deployed to combat it. Against a massive financial markets and banking crisis and a precipitous fall off in consumer demand (closely linked to another crisis in housing) governments have deployed the full might of their monetary and fiscal arsenals. The delicate job of timing the withdrawal of this stimulus (in order to prevent future inflation) is going to be what decides the shape that this recession ultimately takes.
Few would bet against “Helicopter” Ben Bernanke, recently nominated for a second four- year term, doing what it takes to prevent a recession and deflation in prices (Goldman Sachs recently predicted that the Fed would double its balance sheet again to $4 trillion if that was required to keep credit markets functioning smoothly). The risks as Roubini forecasts them are therefore likely to be inflationary. The capital markets will be watching Bernanke closely in coming months, and for bond market investors in particular, it will be imperative that he does not appear to be underestimating these risks.
L 2009-09-25 16:28:50 Rosalie an L-shaped recovery means that after a crash there is a very long period of no or negative growth not a pleasant vision at all - Fred
Bernanke is no Volcker 2009-09-22 13:38:10 As you cannot compare the populist Bernanke to the steadfastness of Volcker there is no way to think any recovery now will be anything like the recovery of the 1980s. With Bernake in charge I'm afraid an L-shape recovery is the only option... - Jaco Strauss
What shape the economy 2009-09-10 11:36:39 Its what Japan has suffered. Economy fell in a heap 20 years ago never to recover. At least so far. - Peter
L Shaped Recession 2009-09-02 20:43:04 If an L-shaped recession is forecast there is no recovery expected at all. - Charles WIlson
What shape the economy 2009-09-01 21:25:10 Now I know what a V and a W is but please can you tell me what an L shape is? - Rosalie
The worst global recession since the 1930s may be over. Led by China, Asia’s emerging economies have revived fastest, with several expanding at annualised rates of more than 10% in the second quarter. A few big rich economies also returned to growth between April and June. Japan’s output rose at an annualised pace of 3.7%, and both Germany and France notched up annualised growth rates of just over 1%. In America the housing market has shown signs of stabilising, the pace of job losses is slowing and the vast majority of forecasters expect output to expand between July and September. Most economies are still a lot smaller than they were a year ago. On a quarterly basis, though, they are turning the corner.
2009-09-25 16:28:50
Rosalie an L-shaped recovery means that after a crash there is a very long period of no or negative growth not a pleasant vision at all - Fred
Bernanke is no Volcker
2009-09-22 13:38:10
As you cannot compare the populist Bernanke to the steadfastness of Volcker there is no way to think any recovery now will be anything like the recovery of the 1980s. With Bernake in charge I'm afraid an L-shape recovery is the only option... - Jaco Strauss
What shape the economy
2009-09-10 11:36:39
Its what Japan has suffered. Economy fell in a heap 20 years ago never to recover. At least so far. - Peter
L Shaped Recession
2009-09-02 20:43:04
If an L-shaped recession is forecast there is no recovery expected at all. - Charles WIlson
What shape the economy
2009-09-01 21:25:10
Now I know what a V and a W is but please can you tell me what an L shape is? - Rosalie