Thu, Apr 23, 2009 page9

• There’s more to recovery than hitting bottom

  • By Brian Love / REUTERS
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  The world economy may hit bottom in the months ahead but recovery risks being longer and more laborious because this recession began in banking and spread so widely — two traits that made the Great Depression so hard to shake.

  So much so, Harvard economist Kenneth Rogoff says, that the US will likely need until the end of 2011 to recover the per capita GDP it had when the recession began at the end of 2007.

  The same goes for at least Britain, Spain and Ireland, even if other parts of Europe and, above all, Asia need somewhat less time, Rogoff, a prominent recession researcher, says.

  “Although the odds of depression are now way down, it is wrong to assume the US will necessarily have a normal brisk post-recession rebound,” he said in an e-mail exchange.

  Why? Basically, of myriad recessions over the past century, the worst were those rooted in banking crises and the other bad ones were those that happened in many countries at once.

  This one is both. Right now though, some banking sector economists are talking up the recovery story after several high-frequency reports on the state of the economy suggested things are, if not getting better, at least getting worse at a less frenetic pace than before.

  Industry output sank further in the US and Europe last month but less steeply than in previous months, while China’s accelerated from record lows of earlier this year. PMI surveys of corporate business managers also improved somewhat across much of the world.

  What happens after the economy hits bottom is another story and the newfound optimism, accompanied by a rise of more than 25 percent in stock prices in recent weeks, stops there.

  “Based on the assumption that financial market conditions will only gradually ease up through next year, we would expect a fairly slow recovery,” said Jorgen Elmeskov, chief economist at the Organisation for Economic Co-operation and Development (OECD).

  The OECD recently forecast a 4.3 percent GDP drop this year across its 30 member countries, comprising mainly the industrial powers, but not the likes of China, and a recovery starting some time in 2010. China’s economy, which has been expanding for years at breakneck speed, slowed to its weakest level on record in the first quarter of this year.

  Elmeskov said the fact some economic indicators were “less abysmal” of late changed nothing. The OECD expected things to stabilize sometime around the end of the year. History is the only guide to what might happen then.

  Recessions typically last a little short of a year but this one could last twice as long or longer because, as in the Great Depression, it has its genesis in a financial crisis and spans so many countries simultaneously, recession research suggests. Governments have yet to rid banks of the assets that turned rotten with the collapse of the subprime and mortgage-backed debt derivatives booms two years or so ago.

  Past recessions where banks were the main cause did not end before the banking mess was sorted out, IMF chief Dominique Strauss-Kahn says.

  “But little has been done so far,” he says.

  The fact that the downturn is synchronized across so many countries and regions also makes it more difficult to exit via the classic channel of a pickup in trade and export demand, argues the IMF, which reviewed 122 recessions since 1960.

  “Recoveries from these recessions are often held back by weak private demand and credit,” IMF economist Alasdair Scott said. “This reflects in part households’ attempts to raise savings rates to restore their balance sheets.”

  Just how much damage repair there may be to do is clear in an analysis by Rogoff and the University of Maryland’s Carmen Reinhart of the 15 or so major financial crises since World War II. What happens on average, they say, is this:

  • Unemployment rises 7 percentage points over four years.

  • House prices fall 35 percent over six years.

  • Equity prices fall 55 percent over three-and-a-half years.

  • Output as measured by per capita GDP falls over 9 percent, peak to trough, over two years.

  • Debt levels rise 86 percent.

  This recession spread from the US, where it took hold in December 2007, according to the US National Bureau of Economic Research, an authority on recession-dating.

  That means this one is overtaking those that followed the oil crises of 1973 and 1980, which lasted 16 months, peak to trough. It also tops the dips of 1990 and 2001, which were eight months by bureau measures.

  The Great Depression lasted 48 months, however, and what many economists and policymakers are hoping this time is that the speed of government intervention will make a difference.

  Interest rates have been slashed to record lows, while fiscal anti-recession spending this year and next is officially estimated for now to be worth some US$4 trillion. The big unknown is how many trillions more it will take to clean up bank balance sheets and, above all, when.
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