The Great Stabilization

Recession was less damaging than expected. The consequences will be more dangerous than many assumed

In a year when the world economy experienced the deepest recession since the Second World War, these events were called "The Great Recession." The opposite also can be called "The Great Stabilization. 2009 is unique not only because of the extraordinary fall of production, but also those that managed to avoid catastrophe.

Twelve months ago, a panic due to bankruptcy of Lehman Brothers pushed the markets to collapse. Global economic activity, from industrial manufacturing to foreign trade, fell even faster than in the early 1930's. Nevertheless, at this time, the decline was halted for several months, and the emerging economies have gone through this process faster. The output in China, which stopped growth, but never fell, showed an annualized growth of almost 17% in the second quarter. By mid-year in the major economies (except the UK and Spain) began to grow again. Only a few backward countries such as Latvia and Ireland, are still in a recession.

It suffered significant collateral damage. The average unemployment rate according to the OECD amounted to 9%. In the U.S., where recession has started much earlier, the unemployment rate doubled to 10%. In some countries, years of progressive work on poverty reduction have been spent in vain, as the weak economy and high food prices are doubly hit the poorest. However, due to resistance of large and populous countries like China, India and Indonesia, the developing world has experienced is not much more serious recession than in 1991. For many people in the world, this recession was not so much, and "Great".

This outcome was not inevitable, it was the result of a large, rapid and volumetric response of the problem. Unstable banks was provided by multi-trillion-dollar support in the form of taxpayers' money and other guarantees. The central banks lowered interest rates, big banks sharply increased their balance sheets. Governments around the world have developed and introduced financial incentives. This extraordinary activity helped to stop the panic, to support the financial system and deal with falling demand in the private sector. Despite claims to the contrary, the Great Recession would be a Depression without these measures.

Stable, but fragile
This is the case with the good news. The bad news is that stability today, albeit a very acclaimed - alarmingly fragile, both because of the fact that global demand is still dependent on government support and because the public is silent about solutions to old problems while creating new sources of instability. Real estate prices in most countries are falling rather than rising, and the nationalization of Astraliyskoy Hypo Group argues that bank pressure is still ongoing. Visible signs of success, for example, the early return of U.S. banks, the state capital, makes easy to forget about the fact that recovery is still dependent on government support. Remove the temporary effects of restocking, and it turns out that most of the global vspleksa demand depends on the state treasury: from the official vspleksov induced investment in China, to provide an incentive costs in the United States. That is, it is in large developing countries, recovery is gaining momentum, while in developed countries, governments are trying to prevent retsedivov.

This discrepancy will continue. Demand in developed countries will remain low, especially where there is a higher household debt and severely damaged the banking system. Despite all the talk about reducing the leverage, the debt of American households, compared to their income only slightly below its peak, and about 30% higher than the level a decade ago. British and Spanish households have adjusted even less, so the probability of prolonged weakness in private spending is much higher. Given that the state contract includes the burden increases, governments of developed countries will be increasingly difficult to borrow even more to compensate. The contrast with the better management in developing countries will grow. Investors are already concerned about the Greek's default, but the rest of the euro area is also at risk. Even the United Kingdom and the United States may face higher cost of borrowing.

Large developing economies face the opposite problem: the specter of asset bubbles and other distortions produced by the government, forcing them to keep the financial terms are too free and too long. China is concerned about the scale and composition of their incentives. There is disturbingly excess liquidity and therefore the government does not allow the yuan to be valued to the extent to expand the economy towards consumption. Free monetary policy in developed countries makes it difficult to compress the economies of developing countries, even if they need it, as because of this they will absorb even more speculative foreign capital.

Fine Line
Move smoothly if the world economy from the Great Stabilization to sustained recovery depends on how to cope with such problems. Some tools are obvious. A stronger yuan would cause rebalancing China's economy, reducing pressure on other emerging markets. Possible plans for the medium-term budget cuts could cause a risk of growth of long-term interest rates in affluent countries. But there are real trade-offs. Tightening monetary policy can kill a recovery in the rich countries, and monetary stance, which plays a role in the domestic U.S. economy, added to the problems facing the developing world.

That's why politicians faced with technical difficulties to develop an exit strategy right. Worse, they must do so against a background of clouds gathering over them. As the tax on bank bonuses in the UK, fiscal policy in developed countries, risk facing public anger at the bankers and the failure of their salvation. The independence of the Fed in the U.S. is under pressure Konrgessa. Politics, leading to high unemployment, means trade shocks, which lead to greater risks, particularly to China.

Put all together and what happens? Pessimists expect vsemozmozhnyh shocks in 2010, from the sovereign debt crises (Greek default?) To the rash of protectionism (U.S. tariffs against "unfair" cost of the Chinese currency, for example). More likely abundance of smaller problems on a sudden sharp increase in interest income on bonds (Great Britain before the election), to short-sighted decisions of tax (tax on financial transactions) and to strike because of wage cuts (British Airways - is a sign). All these trifles, compared with cataclysm year ago, but enough to keep a joyful holiday.

Economist
December 17