:: Jayati Ghosh

Is recession really over?

Jayati Ghosh

June.16 : So is it over already? The global financial crisis of 2008 spurred an unprecedented real economy response in terms of recession and economic downswing across the world. But in the past month, analysts and economic observers have started finding some hopeful signs of the "green shoots" of recovery in all sorts of places.

Thus finance ministers of the Group of Eight (G-8) countries meeting in Italy last week noted that "there are signs of stabilisation in our economies, including a recovery of stock markets, a decline in interest rate spreads, (and) improved business and consumer confidence". Even so, their communiqué cautioned that "the situation remains uncertain and significant risks remain to economic and financial stability".

Indeed, the second of these two statements is really the one that should be taken seriously, even though the international financial press has given much more space to the first, and to any optimistic perceptions and statements that could serve the purpose of "talking up" the economy.

It is certainly the case that the relatively rapid and extremely large monetary and fiscal measures taken by Organisation for Economic Cooperation and Development (OECD) governments in the wake of the crisis have had some effect in stabilising markets and moving away from the possibility of financial meltdown that seemed to loom a few months ago. The financial support and effective of many major financial institutions, humongous bailouts of financial and other companies, the significant increases in public spending, have all had some impact.

But in many countries, such measures have been taken unwillingly and in some countries the sheer extent of the economic emergency is what forced these policies upon governments who are wedded to ideas of unregulated markets and the limiting the economic role of the state. That is why, the minute it seems that there is some light at the end of the tunnel, there is already clamour for abandoning such moves. The G-8 communiqué talks of formulating national level "exit strategies" "for unwinding the extraordinary policy measures taken to respond to the crisis" — a reference to the huge budget deficits and high levels of public debt that many countries, especially the US, have accumulated through the bailouts and stimulus packages they have put in place.

But is it safe to talk about unwinding such policies already? This clearly depends on whether the worst is now over and the recession is already bottoming out. But in fact the figures are yet to point to a definitive revival. As of May 2009, the economic scenario remains uncertain, if not bleak. The rate of unemployment in the US, which was less than five per cent in the first quarter of 2008, rose to 8.1 per cent in the first quarter of 2009 and 9.4 per cent in May 2009 — its highest rate for the last 26 years. In the European Union, unemployment rose 6.8 to 8.1 per cent between the first quarters of 2008 and 2009.

Similarly output growth gives little cause for optimism. Quarter-on-quarter growth rates of US GDP (as measured relative to the corresponding quarter of the previous year) declined sharply in the last quarter of 2008 and first quarter of 2009 across the G-8. This decline was even sharper in the UK and the EU, than the US.

So despite signs of recovery in the stock market, the real economy crisis had clearly not gone away by the beginning of April, despite huge infusion of funds by G-8 governments. The big thrust seems to be over and the recovery is still not in sight. What it has possibly done, and even that is not certain, is prevent the recession from turning into a depression.

So what explains the optimism? One straw that is being clutched at is evidence that the rate of decline of economies is slowing. For example, the rate of monthly declines in both employment and output in the US has fallen. Similarly, there is a perception that US producers may be reaching the phase of their inventory cycle where an increase in production is inevitable.

Basically, the argument is that since things are so bad, they can only get better. But this is not so obvious, because it is also possible to have continued stagnation at the depressed level rather than recovery. Even if the downturn is touching bottom in terms of the stabilisation of the rate of decline, the decline could persist and the economy could "bounce along the bottom". That is, there is no "statistical" reason why a stable rate of decline should automatically lead to lower rates of decline and positive rates of growth in the coming months or quarters.

Also, it is unclear whether there would be adequate alternative stimuli to sustain the recovery when the effects of the already implemented fiscal stimulus wane. Governments could hold back on providing any fresh stimulus because of arguments of the kind espoused by conservative economists, representatives of the financial sector and even some European governments, which emphasise the dangers of inflation.

This is for example exactly what happened in the US in 1936, when early signs of "recovery" persuaded the then President Franklin D. Roosevelt to cut back on further public spending, only for the economic depression to experience a relapse. In the US at present, there is a further complication generated by the unprecedented levels of private household debt that have been built up in the recent past and are now being unwound. Fears generated by the recession and rising unemployment and the increased desire to save to make up for the decline in the values of accumulated housing and financial assets are leading to reduce consumption and rising personal savings. So household savings rates in the US rose and consumer spending fell in March and April this year.

With such trends in the major global economic driver, it is clearly far too early to say that the world economy is on the path to recovery. Particularly since the problems that caused the crisis in the first place — the effects of financial deregulation and the huge global macroeconomic imbalances — are still to be effectively addressed.