Although Europe and the US are out of recession and look set for at least a modest pick-up in GDP in 2010 - a far better outcome than the prolonged recession many predicted in early 2009 - this is a distinctly optimism-lite recovery with a heavy focus on downside risks and the costs to the taxpayer of the war on recession. In fact, the economic mood at the turn of the year has been sombre. Is economics living up to its description as the 'dismal' science?
If recovery euphoria is distinctly lacking, this reflects the continuing threat of further shock waves, for example from property markets, the financial system and country debt crises. And policy-makers will increasingly focus on determining exit strategies, adding to the risks ahead. The possibility of a double-dip into recession remains painfully evident even in some of the countries which bounced back strongly from the post-Lehman disaster. For example, Singapore recorded a surprising drop in GDP for Q4: despite this being due largely to one-off factors, it illustrates that policymakers can ill afford to rest on their laurels and assume that steady growth has resumed. And US car sales dropped back sharply in the autumn after the scrappage scheme came to an end, suggesting potential for the pick up in consumer spending to fizzle out.
Unfortunately, regenerating growth is a far slower, and more uneven, process than the rapid dive into recession. The world economy is still some way from returning to its previous peak let alone where businesses had expected to be by now. Conditions remain extremely fragile in all major advanced economies and the next stages of recovery will have to rely on self-sustaining growth in the private sector rather than easy money and public support. The heavy lifting will have to come from the more robust sectors such as services, which saw only a shallow recession (especially in the US), and the likes of ICT, where there was a sharp but short slump from which producers are already picking up (favouring Asian exporters).
Notably, growth remains very weak in Europe where trouble spots are already breaking out, chiefly due to deteriorating public finances and external debt. The European recovery is generally blighted by weak domestic demand, the need for further adjustment in the banking sector and the threat of fiscal and monetary policy tightening - even positive news on Germany's tax package was overshadowed by concern that the financial crisis in Greece could escalate and spread to other countries. It is critical that the Euro area finds convincing solutions to the problems facing a number of member states. If this is not possible, then talk of EU macro prudential oversight will ring hollow and fears for the future of the Euro area will persist.
In addition, the UK and Spain were the only major economies to remain trapped in recession in the second half of 2009. However, the UK's overall GDP performance in 2009 was actually little different from that of the Euro area and the drop in GDP in Q3 came as a surprise considering that retail sales and in service sector surveys (such as the CIPS/Markit PMI) during the second half of the year were generally quite positive. Analysis shows that these indicators have diverged from the poor performance of the service sector as a whole, which dragged down overall growth. The drop in GDP was also due to one-off factors and anomalies, such as the further running down of inventories as well as higher-than-expected oil and car imports, the latter undoubtedly spurred by the car-scrappage scheme.
In the US, the rebound in domestic demand in late 2009 has been more robust than in Europe and policy looks set to remain easy. But consumer trends remain uncertain and the collapse in the commercial property market is adding to distress in the construction, real estate and banking sectors, forcing more closures among small banks. Nevertheless, to improve confidence in a sustained global growth beyond 2010, it is essential that the US recovery gathers pace - this would also shore up market sentiment and stabilise the dollar, helping other parts of the world as well.
Historically, the US economy has tended to rebound strongly from recession - soft-touch support along with economic patriotism has won the recovery race versus a more meet-our-rules oriented EU approach. Confidence is too low for a Goldilocks recovery scenario for the US to be taken for granted just yet but without it, the global outlook for 2011 will look increasingly vulnerable.
*This is a shorter version of the programme paper, Towards a Post-Crisis Economy: Sombre Mood as Recovery Limps into 2010.
Towards a Post-Crisis Economy: Sombre Mood as Recovery Limps into 2010
Vanessa Rossi and Rodrigo Delgado Aguilera, January 2009
Towards a Post-Crisis Global Economy: Not Out of the Woods Yet, Europe Now the Key Risk?,
Vanessa Rossi, July 2009