Is The Recession Slowing Down?
One of the more frustrating aspects of macroeconomics is that the data used to measure performance and trends is historic. The other aspect to all recessions is that they are easier to gauge in hindsight than in the midst of the recession itself.
The current recession is unusual in both the way that it started and the scale of its impact. It is now widely accepted that the current problems started in late 2007 with the financial market meltdown that was, itself, propagated by excessive lending to the property markets in a number of countries, notably the USA.
The scale of the financial services meltdown was unprecedented and, as yet, is still not fully measurable. Whilst the action taken by the politicians has helped to stabilise the banking system, it has been at an enormous cost to tax payers and to the public finances of many countries. The impact will be felt for many years through the need to reduce public expenditure and raise taxes to balance the fiscal balance sheet over the coming years.
Having been led into recession by the banking crisis, the lack of liquidity has exacerbated normal tools to shorten the impact. Businesses have struggled as consumers have reined back on spending in the high street and on other services. Fear of job losses and stories of major companies going into liquidation have reduced confidence and increased the desire of individuals to spend less or defer purchasing. The spiral continues as demand drops leading to sales and inflation falling.
The official measure of a recession is for two successive quarters of negative growth in the economy. This milestone was reached during the early part of 2008, but many already felt the impact of slowdown long before the official measures confirmed the fact.
So where are we now? Are things getting better or continuing to get worse?
Clearly, the major shocks in the banking system appear to have passed, the majority of banks recapitalised with public money and some confidence returned to the integrity of the system. Banks are now cautiously lending to one another – a key factor to improve liquidity in the financial market – and to business and consumer customers. The challenge may not yet be over as there are warnings of further losses to be realised through a write down in commercial property lending portfolio values in coming months. The news has been received with little real panic – maybe because the numbers, whilst vast in normal pre recessionary terms, appear manageable in the current scheme of things.
One of the lag indicators of recession is unemployment. As businesses fail or downsize in response to reduced demand, employees are laid off and sign on for unemployment support. Current unemployment in the UK has passed 2 million – and is expected to peak at over 3 million before the recession ends. This reduced the overall spending power of consumers as there are fewer in work.
Confidence that the politicians and markets are stabilising comes in many guises. Those who make a living by forecasting the future outlook are seeing an end to the current recession. Stock markets around the world have made gains over the past three months. This is an important factor since stock prices are an indicator of likely profitability so rising values indicate that those companies that are surviving have made cuts, are leaner and see a more optimistic future.
As consumers, the property market is probably the easiest indicator of market health. After a couple of years of market correction (falling values!), it seems that process has, on average, bottomed and that buyers are now returning to the market. This return of buyers coincides with a greater willingness of banks and other lenders to ease lending restrictions. The number of mortgage applications and approvals has raised – some driven by normal seasonal demand but some by opportunist investors seeing the time as right to move back in to property.
There are other initiatives that have tried to kick start demand. The car scrappage scheme, supported by the government and manufacturers, appears to be stimulating demand in the important automotive segment. This will help support the whole supply chain.
Retail spending is probably the lead indicator of the recession coming to an end. After all, it is demand for products and services that will help businesses improve profitability, employ people and contribute through higher taxes. Retail spending is, in part, driven by confidence that things will not get worse and that prices will not fall further.
Maybe, just maybe the end of the recession is in sight.