Enjoy it while it lasts

Global recovery: this time it's different

The economic news is getting better in most of the developed world. But the financial miasma remains poisonous, even after five years of economic clean.

With real per capita GDP still at or below the pre-crisis level in most countries, and unemployment rates much higher, there is a lot of room for improvement. And, there are improvements: most notably, stronger sentiment in the Euro zone, UK and Japan; but also in some measures of actual output, for example European retail sales and United States' car sales and construction activity.

There is enough good data around that when economists next tweak their national forecasts, the revisions are mostly likely to be upward. Of course, these may later be revised back again - that has happened every year since 2008 - but that doesn't seem so likely now.

The excesses in the real economy which were built up during the 2000s' credit boom have mostly been worked down. There is little surplus housing left in the US and the country's trade deficit has stabilised. The imbalances within the Euro zone have shrunk sharply. The drag from rising commodity prices has vanished.

In fact, were it not for the financial system, it would be time for the standard post-recession miracle quarters - double-digit percentage increases in key indicators, seven per cent annual growth rates. But the financial system's problems will prevent that.

Looking backwards, the financial distortions introduced during the credit boom and after the credit crunch are still causing trouble. Portugal's political problems can be traced back to the boom, when foreign lenders pumped up and distorted the economy. And, even the prospect of normalising the post-crunch extremes of monetary and fiscal policy slows down activity.

Looking forward, the exuberance needed for a fast recovery is impossible when there is so much leverage in some private and most public sectors. Regulators are confused, banks are vulnerable and borrowers are cautious.

The financial constraints are not merely tight enough to keep the recovery weak. The financial system is still functioning so badly that the recovery could easily end in another crisis.