Economic debate as pantomime

In: Uncategorized

15 Jun 2009

The following comment by me appeared in the latest Fund Strategy (15 June).

Oh no it isn’t! Oh yes it is!

The debate about whether the world is recovering from recession is getting mightily confusing. Economic discussion has been largely reduced to pantomime.

Last week pundits latched on to several indicators that appeared to show Britain and America are recovering from the economic downturn. Work by the National Institute of Economic and Social Research, a leading think tank, suggested the British economy grew slightly in April and May. In addition, judging by the latest month’s figures, business confidence is rising, factory output is increasing and house prices are up. On the other side of the Atlantic the Federal Reserve’s Beige Book suggested America’s downturn is moderating, while retail sales rose in May.

But hold on. There is also a lot of bad news out there. Many big exporting countries have reported bad monthly trade figures, including China, Germany, South Korea and Taiwan. Meanwhile, industrial production in the eurozone suffered a record fall in April while the European Central Bank (ECB) has forecast that the region will remain in deep recession till mid-2010. The ECB also had to lend €3 billion (£2.6 billion) to the Swedish central bank to help deal with the fall-out from the crisis in Latvia. In addition, several more countries have recently entered recession, including Brazil, Romania and Switzerland.

Nor is the divide between the Anglo-Saxon economies and the rest. Lombard Street Research argued that the jump in retail sales was mainly to do with the increase in petrol prices rather than economic recovery.

What does all this conflicting data show? For a start, reality is complex. Understanding it means more than looking at a few sets of data.

More importantly, far too much attention is paid to short-term indicators. Even when recovery comes, it is likely to be anaemic.

At some point the world will escape from technical recession. Growth will be restored in strict mathematical terms, but looks set to be weak. The economic growth dynamic in the developed world is generally feeble and there is also a large debt overhang.

The key challenge facing the world economy over the coming years is how to achieve a path of strong growth. Far better to discuss this problem than have a pantomime discussion on “green shoots”.

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