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Steve Schifferes

Has the recession bottomed out?

by Steve Schifferes

22 May 2009

There is some cautious optimism around to suggest that the worst of the rapid decline in world economic output may be over.

Jean-Claude Trichet, the president of the European Central Bank, said there was a "slowing down in the decrease in GDP", while certain countries were already reporting a pick-up.

"We are, as far as growth is concerned, around the inflection point in the cycle," he added.

Meanwhile, the Organisation for Economic Co-operation and Development (OECD) has suggested that there are "tentative signs of, at least, a pause in the economic slowdown" in France, Italy, China and the UK.

These signs are based on its composite leading indicators index (CLI), which tracks forward-looking economic data and normally provides advance signals of changes in economic activity.

The CLI for March ticked up by 0.3 points in the UK, although it was still 5.4 points lower than one year ago, and moved up 1.2 points in France and 0.9 in China.

There were other signs of a tentative recovery in the UK, with retail sales up by 4.6% like-for-like in April after a strong Easter, and manufacturing output declining by a smaller amount (0.1%) in March than any time in the past 13 months.

Meanwhile, the National Institute for Economic and Social Research said that the rate of decline of GDP had slowed in April.

There are also signs that housing market activity in the UK is picking up slightly, with mortgage approvals up 4% and surveyors reporting increased interest in house purchases.

"The patient has been stabilised and a recovery is imminent," said Hetal Mehta, of the Ernst & Young Item club of forecasters.

Small signs

There have been tentative signs of optimism in other leading industrial countries, with German business confidence moving above its low point in the closely-watched Ifo survey, while in the US consumer confidence recovered from its absolute lows in the last few weeks.

World stock markets have also recovered from their lows in March, with the FTSE world equity index up 40% (excluding Japan).

But there is a need for caution in interpreting these figures.

In the first place, the evidence for "green shoots of recovery" is largely based on surveys that track the expectations of businesses and households, not their actual behaviour.

This may predict future actions. But in most of the real economy, other, lagging indicators such as unemployment and manufacturing output are still getting worse.

Rising unemployment, which could reach 9% in the UK, 10% in the US and 20% in Spain by the end of the year, would have a negative effect on consumption and the housing market.

Secondly, the signs themselves are only pointing to a less severe recession, not an actual recovery.

Many of the surveys which make up part of the leading indicators index are still negative. Although businesses and consumers are slightly less pessimistic than in previous months, they are still far from optimistic.

Thirdly, the tentative signs of recovery are not yet very strong in some of the biggest economies in the world, such as Germany, Japan and the US, where the OECD leading indicators index is still pointing towards further weakening.

And conditions are still deteriorating in developing countries, apart from China.

Without the big economies participating, any recovery next year is likely to be anaemic.

2010 recovery?

What is looking more likely is that the pace of decline in economic activity may be slowing.

This is hardly surprising, given the severe drop in economic output in the main industrial countries since the financial crisis broke with full force late last year.

In the UK, the economy declined by nearly 4% in just the last six months, while in the US, the annualised rate has been more than 6% for the last six months.

A continuation of that pace of decline over the next year would have pushed the world closer to the level of the Great Depression, when output declined by 25% over three years.

The scale of the intervention by governments, both in implementing economic stimulus packages and supporting the banking sector, is only now beginning to affect the economy, and is certainly having a moderating effect.

However, it still looks fairly inevitable that in 2009, the world economy will fall into the deepest recession since World War II.

What is more uncertain is whether the contraction will continue into 2010, or whether further government intervention will be needed to produce a real recovery.

If the leading indicators are correct, we may see a modest return to growth in some countries next year - but not big enough to return their economies to the level of economic activity before the recession began.

Financial worries

According to the IMF and many leading economists, the biggest uncertainty remains the weak state of the financial sector, which precipitate a further fall in output.

As economist Barry Eichengreen of Berkeley says, "For green shoots to grow, they need watering - with liquidity from the banking system, which is not currently able to provide it."

So far, the "stress testing" of major banks in the US - which identified the need for some $75bn in new capital - has helped to boost confidence in the financial sector.

The IMF has urged a similar exercise in Europe, but has warned that there could still be another $3 trillion in losses for the financial sector as a whole before the crisis is over.

Until these "toxic assets" have been dealt with, it is difficult to imagine a strong recovery - and even the current increase in confidence could bottom out.

So while we may have passed the worst of the recession, it is by no means certain that we have returned to "normal" growth - or even whether we know what it is.

Published: BBC News

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