2009-07-30
The U.S. recession has entered its 20th month. It is the longest and most severe growth decrease case since the 1930s. Back then, the economy was in the recession state for an incredible 44 months.
A massive and aggressive policy, not only in the U.S., has made us avoid a recapitulation of the 1930s. SEB´s chief economist Robert Bergqvist writes this in his chronicle this week.
Positive economic indications during the late spring and summer have confirmed that the global economy has stabilized after having declined throughout the winter. Households, businesses, central banks and politicians now have a cautious hope in a so far very difficult and challenging economic environment. The risk of collapse of the financial system has decreased significantly. A turning point, namely that the economies start to grow again, should soon be within reach.
It should be mentioned again, despite all the positive signals, how serious the situation has been and how vulnerable and weakened the world economy - and also the financial system - still is. The risk of setback is large. Many economies are on "artificial respiration" and politicians engage in bridging policy. An uplifting point is that we have not seen the full effect of the aid packages. It is expected to be seen in the next year.
In order to get sustainable and self-sustaining growth, increased consumption of households and increased investment by companies is required. The questions are, however, many including households need to increase their savings and reduce debt, corporate excess and exports, for example in the U.S. to move forward and act as traction units in the economy. It takes a reasonable amount of time before we see a recovery in which job permanently are re-created without state support, and companies have a need to invest in production capacity again.
The large dark gray, but still less pessimistic, conjunction picture is supported by many reports that are now coming in. The orders have stopped decreasing - but they are not expected to grow during the third or fourth quarter of 2009. Question marks are at the same time many and large in terms of order volume in 2010. In this environment, with weak underlying demand, it is difficult to see how investment will begin to take off and increase growth.
Recently, the world has in various ways attempted to declare the official end of the U.S., and world's, most recent recession. But the task is not that simple. Officially, it is the National Institute of Economic Research, NBER, which determines the state of the U.S. economy. This is not just about GDP growth, the labor market is an essential component of NBER's recession analysis.
The U.S. labor market has shown signs of less job losses although several hundred thousand jobs disappear each month. The labor market thus continue to weaken, but at a slower pace. The job losses are also the ones right now that mainly concerns those who put the interest rate on Fed. Around 150 000 jobs must be created each month in order for the unemployment rate, which today is on the high 9.5 percent, to be held back. A turnaround will increase employment only for those currently working part-time and reduced working hours. This implies that the recession, according to the strict NBER definition, will not be over for a while.
The proximity to the bottom that we are seeing has come a bit earlier than we predicted. But the main issue, which is more important than the issue of time is: what can we expect beyond the turning point? We see so far, hardly any real signs of sustained growth in terms of investment and consumption.
There are still imbalances that must be corrected. As long as production is below what could be produced there is no need for either employees or to make investments. The real recovery lies considerably in the future.