Industry | 2009.05.17
Armageddon averted? | Larry Elliot
The economy, we\'re told, is bouncing back. Here is a checklist to help test if the recovery is for real
Panic over. Six months ago, you could not pick up a newspaper or watch the TV without sensing that the global economy was imploding. Banks were being bailed out, the stock market was in freefall, factories were being mothballed. Shaken to its very foundations, capitalism would never be the same again.
But that was then. Capitalism, it appears, has made a deathbed recovery. It is out of intensive care and, while not quite fighting fit, is doing well in the recovery ward. Another few months should see it as good as new.
Don\'t be fooled into thinking this is something flammed up by a media suffering waves of ennui after two years charting the path from boom to boost. While Depression chic is now last year\'s thing, there are reasons to believe the worst of the crisis may be over, certainly for now. Estate agents say buyer interest is running at its highest level in a decade; retail activity last month was the strongest for three years; the decline in factory output in March was just 0.1% – the least bad performance since early 2008.
Internationally, there are the first signs of a recovery in world trade after last autumn\'s collapse. The lead indicator of the global economy produced by the Organisation for Economic Co-operation and Development – a guide to future activity – recorded a sharp bounce in April, suggesting a V-shaped recession is no longer out of the question. Financial markets certainly believe so. Share prices are up 25% in the UK since early March; the oil price was back above $60 a barrel yesterday.
It\'s easy to work out why something is stirring out there. The collapse of Lehman Brothers last September deepened the financial crisis, starving companies of credit. Companies met demand from stocks, and the deep cuts in production fed through into the biggest decline in trade since the 1930s. Governments responded to the crisis by cutting interest rates to emergency levels, by allowing budget deficits to balloon, and by allowing their central banks to create new electronic money.
A few months ago, financial markets feared Armageddon was just around the corner. But it has been averted. The financial system has not collapsed; companies have depleted their inventories and are planning modest increases in production; tax cuts and cheaper mortgages have boosted spending power. Output is declining but at nowhere near the pace at the turn of the year. Given the scale of the stimulus, that\'s a relief.
There is, though, a big difference between an economy getting worse more slowly and one that is fully recovered. Even if the modest signs of improvement develop into rising output by the autumn, there is still a strong risk of a relapse into a double-dip recession. Here is a checklist that should help determine whether the recovery is for real.
One. Dig deeper into the data. While it is true, as the Royal Institution of Chartered Surveyors reported yesterday, that fewer estate agents are reporting price falls than six months ago, the rise has only taken the market back to levels seen during the property crash between 1990 and 1992. As DH Lawrence once said: never trust the artist, trust the tale.
Two. Watch what the central banks do. Last week, the Bank of England kept the bank rate at 0.5%, but more significantly it announced that it was stepping up its quantitative easing programme – creation of new money to compensate for credit lost to the economy from foreign banks and specialist lenders – by £50bn. Threadneedle Street fears that a banking system which has suffered its most grievous shock in a three-quarters of a century remains fragile.
Three. The labour market matters. Optimists seized yesterday on news that the number of people out of work and claiming benefit rose by 57,100 in April – smaller than the 73,700 increase in March and less half the record 136,600 jump in February. But the government\'s alternative measure of joblessness – the labour force survey – showed unemployment up by almost a quarter of a million in the first three months of the year, the worst performance since 1981. What\'s more, the halving of City bonuses and the pay freezes imposed by firms means that average earnings are falling for the first time in living memory. That will affect consumer spending power.
Four. Keep an eye out for China. Economic figures from the world\'s most populous country are notoriously unreliable, with an announced 8% rise in March industrial production sitting oddly with a 3% drop in power use. A sustained rise in Chinese exports would suggest that demand in the rest of the world – particularly the US – has turned. Between March and April, exports fell by 3.5%.
Five. There will be no real recovery until the US housing market stabilises. There have been tentative signs of activity picking up, but mortgage rates are still high, property prices are still falling, the number of people in trouble with their home loans is increasing, and losses for Wall Street banks are mounting. As Gordon Brown never tires of telling us, this crisis began across the pond. And that\'s where it will end.
For more information, please visit
http://www.guardian.co.uk/commentisfree/[...]12/economic-recovery-recession
