In a series of Chatham House briefings over the past year, experts have argued firstly, that the recession would be deeper than expected; secondly, that extraordinary measures would be needed to stabilise economies in free fall; and finally, that recovery would only slowly emerge by the autumn of 2009. In spite of the pick up in growth from the depths of the recession, the risks posed by still-fragile economic conditions and low levels of demand for banks, corporates, and jobs should not be ignored.
This is not the time to start up exit strategies but the G20 should agree to a last push to ensure that a sustainable recovery can be generated in 2010.
Policymakers are making the best of the modest upturn that is now clearly underway and understandably this can be used to improve consumer and business confidence. But as central bankers are warning, the level of economic activity remains very weak. This is a potential stumbling block for business planners, who need greater assurances about both the scope for short-term recovery and long-term growth prospects in order to move ahead with new investment in physical capital and also their workforces.
In two companion papers, Vanessa Rossi and Rodrigo Delgado Aguilera address the debate over long-term projections and their influence on today's policies (Programme paper 09/02) and the short-term indicators for the leading economies (Programme paper 09/03).
Key points are:
- The latest data are generally pointing to a modest improvement in economic conditions albeit activity levels are still dangerously below pre-crisis peaks. Following confirmation of a bounce back in growth for Asia (including Japan) in the second quarter, there was much greater surprise at the announcement in mid-August of a small pick up in GDP for France and Germany, spelling the end of recession for these two leading EU economies.
- Less fortunately, there was little critical appraisal of what the figures portrayed for the Euro area economy, which remained in recession. A further drop in imports in both France and Germany, on which their gain in GDP depended, was downplayed. Indeed, their Q2 gain in GDP could be called a 'beggar-thy-neighbour' rebound rather than a true recovery. Hopefully Q3 will see both imports and exports starting to pick up, generating a more widespread recovery from recession.
- With consumption generally being stabilized by low interest rates and fiscal stimulus, including car scrappage rebates policymakers must now turn their attention to the problem of regenerating business optimism and investment growth, which requires a return of confidence in both short-term prospects and long-run growth.
- Long-term GDP projections (and estimates of output gaps) are under review but proposed changes should not go unchallenged as they are highly debatable, politically sensitive and critical to the short- to medium-term outlook given their influence on investment decisions and also policy setting, especially the timing and scale of exit strategies.
- Revised estimates for future GDP, public-sector deficits and debt will be particularly important for the Euro area given that currently high budget deficits are pushing up average debt to 80-90% of GDP, well above the target of 60%. And adjustments required to bring debt down will be even tougher if GDP growth stays low.
Overall, these developments must be monitored carefully: in ensuring an exit from recession, sequencing and consistency of policy will be more crucial than ever.