People talk a lot about the gloom and doom of this global recession. Now there is a new expectation -the gloom and boom. The economic recovery could happen much sooner—and be much stronger—than anyone thought possible.
Even Federal Reserve Chairman Ben S. Bernanke recently admitted that there are signs that the sharp decline in the U.S. economy, which is the world biggest, is slowing, making for a potential first step toward a recovery.
Suddenly, a small but growing group of private-sector economists is disputing the idea that the recession will drag on for months and that the rebound will be as weak as those following the 1991 and 2001 downturns.
These economists and others see a V-shaped pattern, similar to that of the recession-recovery periods of the 1970s and 1980s. And they say there is ample evidence to support it.
Among the reasons for the new optimism: a significant easing of the credit crunch, improvement in consumer spending—including better auto sales—a potential bottom in housing, a less-grim jobs picture and expectations that the government's massive stimulus spending could start boosting economic growth almost immediately.
The recession may not be over yet. But the end is closer than people think. Though the decline in first-quarter growth will be along the lines of the six-plus percent plunge of the fourth quarter of 2008, some economists now expect a flat or slightly negative showing in the second quarter, followed by the beginning of sustained growth in the third quarter. That’s three months sooner than what many were forecasting several months ago.
That dynamic will lead to swifter and stronger recovery in both the economy and employment than many economists are forecasting. Some economists expect a minimum of 4.5 percent GDP growth over the first four quarters of the recovery
Then there are a handful of cyclical elements on the verge of being positives. Consumer spending is growing again, while inventories are being wound down. Housing and autos, in particular, hint at both pent-up demand and a production rebound.
Housing will be an important element of the upturn right from the start. Housing starts have been beaten down so much that supply will have to be added simply to accommodate demographic demand from new households.
The auto sector, which posted a surprise increase in sales in March, also has the potential to be a driving force. The big decline last year had a lot to do with the lack of financing. Automakers are now starting to feel better about the credit environment and will offer better financing deals.
Housing and auto sector will play an important role in the economic recovery. The two sectors erased a combined 2.5-3.0 percent from first quarter GDP, however will add 0.7 percent to GDP in the second quarter. Housing is expected to add 0.5 to 1.0 percent to GDP in 2010.
However, some proponents of the gloom and doom expectation argue that all the government borrowing programs aimed at increasing liquidity could have seriously adverse impacts especially for borrowers.
The influx of cash that government borrowing will push into the economy is expected to cause inflation, which in turn will send up interest rates. As savings stagnate and unemployment rises, already-burdened consumers and businesses may not be able to afford to borrow at those rates.
The prescription of massive debt, of money printing, of releveraging the economy, is exactly what engendered the depression of 2008, “Crowding-out effect” is being discussed more as government cash is set to flood the marketplace in the months ahead. The phenomenon would be felt in several ways—through savings as well as borrowing.
Interest rates will move higher as the economy grows, money circulates and government debt explodes is virtually axiomatic. As the government uses its programs to encourage investors to go into riskier products, it will have to raise the yields on its own debt to pay for its borrowing.
Printing money is not necessarily a correlation to prosperity. That is inflationary and that is not going to promote growth. It promotes imbalances in the economy and most likely asset bubbles in real estate.
By Chodechai Suwanaporn
Source: Fiscal Policy Office / www.fpo.go.th