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| Pain, gain, drain |
| Edward Hadas / Nov 16, 2009, 00:44 IST |
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Recession hangover: Jubilation? No, something more like quiet relief is in order. The eurozone has joined the US and Japan in saying farewell to quarterly GDP declines. That's an improvement on the freefall which looked possible in early 2009. But even if this still tentative recovery proves durable, the economy has suffered too much damage and is still too fragile for anything more exuberant.
GDP does seem to be increasing in most developed economies, although the Breakingviews.com Economic Spot-check (BES) measure is still poised between slow decline and stability. On Friday, the European Union's statistics office reported 0.4 per cent growth in the third quarter. That followed the announcement of a 0.9 per cent increase in the US and precedes an expected 0.2 per cent from Japan on Monday. The UK’s 0.4 per cent quarterly decline puts it well behind the pack.
The return to growth in most places is welcome in much the same way that builders are welcome after a hurricane reduces a house to rubble. Even after the most recent quarter, GDP in the eurozone has still shrunk 5 per cent compared with the peak quarter last year. For the US the decline from the peak is 3 per cent, and for Japan and the UK it is 6 per cent.
Some part of those falls has been medicinal in that unsustainable excesses have been eliminated. But mostly, the drop in GDP and the accompanying increases in unemployment and labour market insecurity are economic diseases that bring pain without gain.
Some forecasters think the pain will fade rapidly. In a few years, they reckon, it will look like the recession never happened. It's true there are many cases of such rapid turns in economic fortunes. But sadly this time is likely to be different.
The financial system is still far from healthy, global trade imbalances have still not been fixed – witness the US trade deficit, which was 18 per cent higher in September than in August – and governments still have the fiscal stimulus taps wide open. In short, there remain many drags on growth and potential triggers for a return to recession. The fear of such a reversion tends to be self-fulfilling, as worried companies and investors hold back on spending. As a result, the recovery could be slow and almost joyless.
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