Filenews 4 August 2022
By Daniel Moss
Ben Bernanke has never been a big fan of "labels". In 2008, the then president of the Federal Reserve urged Congress not to "stick" to trying to define the recession. What mattered most was financial pain and financial difficulties - and the study of how they arose and what should be done with them.
His advice was shockingly correct, given Bernanke's former participation in the academic committee which defines the beginning and end of the expansions of the U.S. economy. They are also important for understanding today's hardships. A lot of time has been spent around whether the U.S. economy meets the practical definition of the word "recession" or whether the technical evidence matters more.
Does it take two consecutive quarters of contraction of gross domestic product (GDP) to fit the description, as is the case in many countries? We can always wait for the official phone call from the US National Bureau of Economic Research, in whose committee of business circles Bernanke once participated. However, the secretive group usually needs about a year to declare the beginning of a recession and rejects the criterion of reducing GDP for two consecutive quarters.
Substance
Talking about labels may well distract attention from the substance. It is better to focus on it: a strong and synchronized global downward trend that shows little sign of abating.
China's economic fragility was underscored over the weekend when reports showed manufacturing is shrinking again. This dashed hopes that the economy was in recovery after a struggle for growth in the second quarter. Revenues to top players in the real estate development space fell by more than a third compared to last year, and home buyers are refusing to pay mortgages for some projects that have stalled.
Beijing is moving away from its growth target of around 5.5% this year. On Tuesday, Bloomberg News reported that the country's leaders told officials to see this figure more as guidance rather than an ambition to be achieved. Private sector economists have already considered it a figment of the imagination for a few months now.
The "engine" of the eurozone, Germany, is likely to already be in recession. Given that gas deliveries from Russia are now a huge question mark, it would not be wise to predict a recovery before next year.
GDP fell for two consecutive quarters in the U.S., and Fed officials say they need to further contain the economy as the cost of containing rapid price increases also rises. Friday's employment report from the U.S. Department of Labour was particularly ambiguous: optimists point to strong job growth in June and an unemployment rate approaching a five-decade low. Sceptics point to the rising weekly unemployment claims and argue that the labour market is often an indicator that reacts late.
Dark prospects
Beyond recruitment in the U.S., the outlook is increasingly dark. The global economy will likely grow to about half of last year's 6.1% last year, the International Monetary Fund predicts. It is not a disaster and is still a short way from the 2.5% threshold used by the global lender to judge whether world trade is in retreat or growing, albeit lamely-crooked.
But the trend is worrying. The fund's forecasts have been heading down for some time now, and officials sound more and more gloomy month after month. The latest forecast, which was released last week, says things are likely to get worse before they improve. The path to higher interest rates that characterises almost every economy - except for some 'naughty' children such as Turkey - will come at a high price. The IMF considers that the elimination of inflation is a vital condition for economic stability, but without pretending that it will be free of cost.
Bank of America economists worry that many predictions are too rosy. Supply chain woes are receiving a lot of oxygen, but a deeper shock is the rapid tightening of monetary policy. Estimates of the economy's performance are rather over-optimistic, the company says, and are very similar to those of monetary policy officials. "Not only is the outlook for growth optimistic, but in almost every economy the central bank seems to be winning the battle with inflation without a recession," Ethan Harris, BofA's global economy economist, wrote in a July 29 report. "Obviously for all these analysts the fight against inflation is a pretty painless exercise."
The problem is global
There are multiple reasons to worry about the global economy as a whole, rather than a series of so-called independent fiefdoms. Very often the first questions addressed to officials about the existence or not of a recession have a taste of "we caught you!". It is better to focus on the underlying conditions.
A touch of empathy is also always helpful. On July 15, 2008, with the rescue of Bear Stearns a few months behind and the collapse of Lehman Brothers preparing to turn into a crater for the global financial industry, Bernanke was confronted by Robert Cassey, a Democratic senator from Pennsylvania, who used the example of a constituent who put food fourth on its list of priorities behind home payments, nursery and gasoline.
"I totally agree with you that whether it's a technical recession or not, the combination of declining wealth, a weak labour market, rising food and energy prices, foreclosures, credit cuts - all these things put enormous pressure on families and explain why consumer confidence is so low," Bernanke had told the Senate banking committee that day. "People are very worried. So I would definitely never claim that, even if we weren't in a technical recession, we're not in a serious situation anyway."
Subsequently, the economy was officially declared in recession.
Much of the focus is on GDP, but the news is not good there either. There are very few positive elements in Europe and in significant parts of Asia. Instead of dealing with textbook type definitions or alphabetical nicknames – remember the 2020 games about whether the recovery was U, L, V or W? - let us accept that this downward spiral has a painful geographical effect around the world.
It is a cause for concern, in any language.
Source: BloombergOpinion
