Economy: Statistical Recovery

'World pulling out of recession'

WYOMING - Central bankers from around the world are increasingly confident the worst of the global financial crisis has passed and that recovery is beginning to take shape.

Federal Reserve Chairman Ben Bernanke and European Central Bank President Jean-Claude Trichet said the world economy was pulling out of its deepest recession since the 1930s.

Prospects for a return to growth in the near term "appear good", while "critical challenges remain", including possible further losses for financial firms, Bernanke said.

Trichet said "green shoots" weren't enough for him to declare the recovery sustainable but "we see some signs confirming that the real economy is starting to get out of the period of free fall".

Another widely syndicated article on the economy that oversimplifies the movements that are going on at the moment, evidencing the contradictory news reporting that has characterised this recession. While the above article reads like a selected snapshot of all the best quotes from Trichet, in another article from the same source at Bloomberg.com, the ECB President warns that it will be "a very bumpy road ahead". Certainly, things are not looking great in Europe at the moment. Although France and Germany have made some economic gains that are pulling up the value of the Euro, it is difficult to tell whether this will last, and Trichet is well aware that Europe is anticipated to buck the trend of marginal growth next year with a retracting economy.

I'm not sure whether this desire to be resolute on whether we are exiting the recession is social or comes from the need to generate decisive headlines. Economists call it the 'statistical recovery', where any minor gain in growth looks better than the statistics that went before. At any rate, it's misleading journalism and things are not as cut and dry as we have been lead to believe in New Zealand.

Just a couple of weeks ago, predictions on rising property prices in Auckland and the rise in sales of alcohol and shoes were seen as green shoots that evidenced that the NZ economy was on the up again. The problem with this is that property is not necessarily the best marker of how the economy moves (as we learnt through this crash) and secondly, alcohol is generally popular during recessions (just look at how the US responded to the recession with a rise in the sales of take-home boutique beers, whiskey and a 20% rise in online dating). Similarly, the cheap cost of parallel imported shoes makes them the equivalent of the lipstick economy after the Great Depression, where people restricted spending but bought little items to treat themselves. This feels like irresponsible journalism to me, taking a fragment of the movement and using it to dictate an determining headline. The reality is that we will not know until we see sustained growth over more than one quarter.

Interestingly, the view of the recession ending that the Herald repeats over and over again is currently under staunch debate amongst economists, a number of whom are saying that green shoots don't necessarily signal good times ahead just yet. A number of economists are saying that this recession will be W-shaped, where small statistical recoveries are followed by another collapse. New York University Professor of Economics Nouriel Roubini argues that these grass shoots disguise the longterm need for new sources of economic growth in the US that will kick in after the marginal recovery in 2011. Conceptualised in terms of letters of the alphabet that symbolise the trajectory of economic recovery, debate is emerging over whether this is an L-shaped, V-shaped, W-shaped, or the new proposed triple-U shaped recession. All of this should indicate that a level of skepticism should be taken in regards to news on the economy, which is all too often dictated by the influence of parties or organisations that are partisan to its effects (for example, why a mortgage broker might be considered an independent, expert voice on the property market on our news is beyond me).

There is a danger in being too celebratory of green shoots: in popularising the notion that the recession may be conveniently over by the next election, we run the risk of lessening the pressure for National to create long-term strategies for growth that don't simply repeat the party line of privatization of public resources and tax cuts.