Thursday, 16 April 2009

L.U.V ing the Recession ?

Ok, let me explain. In the past few weeks, there has been a lot of talk about the recession in general but there seems a lack of agreement about what kind of recession it is.

Recessions, like ice cream in the 1970s, come in three flavours:

V - a sharp dive into recession, a short period at the bottom and a sharp recovery back to pre-recession levels of growth. The recession of the early 1980s iis a good example of this.

U - the economy goes down and bumps along the bottom for a while before a steady recovery back to pre-growth levels. Perhaps the early 90s recession was close to this as it took a while for the impact of the ERM suspension to feed through.

L - the economy goes down, stays down but fails to get significantly worse or better. Japan in the 1990s and arguably the Depression of the 1930s are examples.

There seems a school of thought that growth could return as early as the fourth quarter of this year though early 2010 looks more likely but are we looking at a strong recovery ? There seem a number of reasons why recovery might be slow and faltering at best.

1) Public Debt - the public finances are in a shambles with unprecedented levels of Government borrowing. Servicing and reducing that debt are going to be huge tasks for the Cameron Government leaving little room for fiscal stimulus.

2) Oil - for me, this is the elephant in the corner. In many ways, it was the surge in oil prices in early 2007 that signalled the problems ahead. Last week, on tentative signs of improvement in the US and elsewhere, oil moved back to $52 a barrel. It has since eased back on poor US retail sales (backed up here this morning). IF economic activity did begin to upswing significantly, there's every chance oil would spike in price again choking off the nascent recovery.

3) Quantitative easing - the measure aimed at stimulating the economy and the banks now could well cause huge problems down the line in terms of inflation and high interest rates which would again choke off recovery.

While I don't accept that a 1930s-style Depression is on the cards (as it might have been had a collapse in the global banking and financial system occurred), I don't see much evidence of strong recovery or anything like that. I suspect the first part of the 2010s will be very difficult with low growth or even stagflation - a real dilli of a pickle as Ned Flanders would say and a real political challenge for the next Government.

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