Oh dear, oh dear. Recession talk has been doing the rounds again. Now the IMF, yes it’s them again, have said there is a 25 per cent chance of global recession
The IMF has also been busy downgrading its forecasts. Not so long ago, well last July to be precise, it was predicting global growth this year of 5.2 per cent. The official figures will be out in a few days but, according to Bloomberg, the IMF is now pencilling in growth of 3.7 per cent.
Meanwhile, a debate is roaring over whether the economy is set for a mild slow-down, or something much worse. Yet curiously, while there are plenty of economists who are ridiculing comparisons with the 1930s, there seem to be very few reports which actually provide real justification for hope. Actually, cut through all the doom, we believe that after an unpleasant 2009, and who knows maybe 2010, there are good reasons for optimism. Reasons which seem to get overlooked by many economists, preoccupied as they are with interest rates and confidence surveys.
But before we explain what this real reason for hope is, here is the latest stage in the debate in a nutshell.
Yesterday, writing in The Times, Anatole Kaletsky, the only contemporary economics journalist we are aware of who is referred to in economic text books, outlined a list of reasons why he believed the US was not in recession. His core argument was that while jobless figures are down, they are not down that much, that the imminent tax rebate in the US will give a big boost to consumers, that some indices, namely, purchasing managers’ indices, the industrial production figures and the quarterly consumption statistics are still quite good, and that in any case history tells us recession does not automatically follow financial crisis – and to support this argument he mentioned the stock market crash of 1987, and LTCM in 1998.
It was as if Mr Kaletsky had opened a can of worms. And even Capital Economics, not a group which usually responds to articles by journalists, issued a strong rebuttal of his arguments.
“Private sector payrolls,” said Julian Jessop, Chief International Economist at Capital Economics, “have fallen by an average of close to 100,000 over the past three months and have never dropped at this pace without going on to record average monthly declines of at least 200,000. Even if the latest jobs data are not bad enough to send an unambiguous recession signal, the downward trend is clear.”
It went on to add that the current financial crisis is much more serious than ones Mr Anatole Kaletsky described in the past, while it argues low consumer confidence will mean much of the tax rebate which will be winging its way to households soon, will be saved, and not spent.
But perhaps one of the key arguments relates to US house prices. And at this point we would like to call to the dock another witness.
Yesterday, Alan Greenspan, who once said he would keep a back seat when he retired so as not to undermine Ben Bernnanke, has said he believes US house prices will stabilise later this year.
The interesting thing about US house prices is that, as a ratio to income, they are already below the historical average. According to the IMF, US house prices are about 10 per cent too high, but that is quite modest compared to Ireland – where they are over 30 per cent too high. Furthermore, the IMF has the gap between house prices and what they should be higher in the Netherlands, the UK, Australia, France, Norway, Denmark Belgium, Sweden, Italy and Japan.
The point is, US house prices are set to continue to fall – inventory levels are so high that it appears there is no avoiding this. But, sooner or later, US houses will look cheap. Will that spark a new boom, or instead, will prices keep falling? We all know that equity markets tend to overcorrect. Will the US housing market do the same?
But Greenspan reckons the inventory will be eliminated by the end of this year, and that is when prices will rise. Actually, in his book, Age of Turbulence, Greenspan rattled on about inventory over and over again – he obviously sees this as an important guide.
Looking further forward, the danger now really has to be that authorities will overreact.
In 1930, the US government introduced the Hawley-Smoot Tariff, which raised tariffs on over 20,000 US goods. Many say this made the depression of that era much worse.
The fear has to be that many US politicians, Hilary Clinton in their vanguard, are calling for protection of US jobs. She has popular support for this idea too, and yet such action could lead to retaliatory action, and create a downward spiral. This has to be the really dangerous threat to longer-term economic stability.
But, the reason for hope is this: Technology.
Moore’s law continues to operate, and now technology in other fields is changing fast – generating energy through renewable means is becoming more efficient, our knowledge of DNA is close to throwing up new and truly mind-blowing changes.
That is why the current crisis is not like the 1930s. The Internet provides a means of global communication which will probably make a shot-in-the-foot-type move, such as a modern Hawley-Smoot, unthinkable.
