On my daily basis news update from time to time, I find myself reading about a line of economist very worry about a relapse of the recession, a double dip or a very “gloomish” view of the future, while my feet is firmly set on the ground i need to point several critical differences between 1937 and 2010, while a do agree in the common view, that like during the depression, a large banking crisis derailed the financial system, household struggling with a mixture of large unemployment and a languishing recovery, but this line of economist are relying much more in the history book rather than reviewing the current global situation, my duty is to dispel few myths and unfounded fears arising from the media from time to time.
- It’s a depression like feeling: Yes the recession was awful and the effects may linger around the economic climate for several years, the economy has been expanding at feeble pace for over a year, people returned to spend albeit at more picky ways, and industrial production have been consistently picking up so far the recovery pace proves to be between the average recovery of a financial crisis and the historical average recovery from the typical recession.
- This recovery is very fragile: Well that depends vastly of where your head is looking, during the Great Depression, policy mistakes piled up one against another all around the world, by then only U.S and Europe had enough economic clout and weight to matter, the developing nations were agrarian and commodity exporters, with a large peasant population and thinly populated cities.
Now emerging nations proves to have a large urban population, growing services sectors and deepening domestic markets, booming China now is 2nd largest economy in the world and emerging countries middle class it’s already consuming from domestic and foreign companies, this broad set of countries with healthy financial systems and growing GDP and demand are a floating saviour that during the 30’s was inexistent
- This is a gloomy world and set to be sluggish for years: Yes and no, while most of the western world keep licking the wounds generated by excesses and poor management, most of the emerging world have already been growing as fast as ever, with low debt and healthy macro economy, this is more the picture of a 2 speed economy, thus duality is nearly everywhere, in U.S the lees indebted counties are already lifting their spending rapidly.
- Europe will disappoint: Everyone seems to say this except only by a smallish group of Euro fans, but reviewing raw data people tend to forget that Europe population it’s stagnant vs the 1% growth of U.S, in other terms, when it comes to GDP per capita, EU have been on par or outpacing U.S most of the decade, also EU have a more trade dependent industry network, a German industrial hinterland (with pan-european suppliers) and very good diplomatic-business relations abroad, helping the EU to tap growth with emerging nations, this proves a big leverage to keep boosting growth and confidence to the region, also the EU is very sensitive to devaluations, any big drop end up boosting growth like in the late 90’s.
- New protectionism will hinder trade growth: If during the worse part of the recession, little barriers were erected, it’s not likely that in the near futures will, as trade improved the variety of products and lowered prices across the world, protectionism may fail to take root in the current world.
- Fiscal hawks will push the economy to a double dip: Years from the behavioural economics helped to understand the decision making process of the companies, when it comes to taxes and interest rates the more certain about the future, the better, U.S business community lacks from this, even for economist the scenario it´s like trying to see thru thick fog, Europe instead took a giant step by setting a credible plan to cut deficit this is in fact helping the business to forecast, plan and using this blueprint for the future, the key in here is, clear out the expectations of the market, no matter if the deficit will persist or not, but the importance is to have a blueprint towards a sustained path, showing if taxes will be higher or not, large decisions depend on this government blueprints.
This is not a depression indeed and the elements of it are missing, every recession and depression have it´s similarities and differences, how to analyze and planning for a recovery must come from a deeper review of such diagnosis, so far i see we are not quite there in the same depression like scenario, now the trade is deeper, there are much more goods and manufacturing is more evenly spread across the world, services weigh in the GDP surpass more than 50% in the OCDE countries, and knowledge economy, and tertiary education is rising, this new setting could hold the key to a more sustainable recovery.
