THE view seems to be gaining credence that the world is heading for a double-dip recession, or a W-shaped recovery, whatever you want to call it. In other words, the bullish phase we’re seeing is a false dawn, and there’s more pain ahead before we really get going again.
There’s no actual evidence of this now. All the latest figures suggest things are still getting better: confidence indices, factory orders, gross domestic product growth, exports. Last week, the US purchasing managers index hit its highest level since 2004. There were similar stories from Europe and Japan. China is already roaring away.
Stock markets had their ups and downs in the past few days, but have so far held their 50% gains since their crisis lows. And Warren Buffett is doing his bit by plonking down 26bn to buy the biggest US railroad group. So why does caution, even pessimism, prevail? I suspect it is partly a form of masochism: there actually are people out there who want this to be a horrible recession to force big political changes, punish banks, push through reforms to the financial system and get new taxes in place.
In some quarters there is already a sense of panic that “a good crisis will be wasted”, and that the causes of the credit crunch will not be rooted out.
The political will to start afresh will be lost, and we will merely rush forward to our next crisis. These sentiments are laudable: there is every likelihood that financial reform will get bogged down in politics. But they are not sufficient to wish for more economic pain than we have already suffered.
There are plenty of reasons for caution that are more plausible. One is the classic echo effect of recession itself as the damage caused by the downturn comes winging back to hit the recovery, particularly unemployment, bad debt and curtailed government spending. We’re not quite at that stage yet, but could be by the beginning of next year.
Other reasons have to do with uncertainty over how governments will extricate themselves from the expensive support programmes they have put in place. You can’t switch off emergency liquidity until you’re certain the markets can look after themselves, and that is still far from certain.
Indeed, the pessimists would argue the only reason we have a recovery is that taxpayers are paying for it. Nor can you take the props away from under the banking system until you’re certain it’s strong enough to stand on its own two feet. But there’s progress on that front. Last week, the UK unveiled plans to return its troubled banks to the private sector.
It was reassuring to hear Group of 20 finance ministers meeting in Scotland at the weekend commit themselves to extending their support for the recovery, which means there won’t be any big policy changes soon. The meeting did, however, add fuel to the “crisis wasted” view by rejecting a global banking transaction tax as unworkable. The tax would have helped to pay the bill for bailing the banks out.
It is true that further out we shall have to start paying the bill for resolving the crisis: there will be a huge overhang of government debt, hefty tax increases, a return of inflation pressures, all of which will damp down growth. But everybody knows that.
Indeed, the Fed signalled last week that it might start pushing up interest rates in the next six months, and the European Central Bank has begun to talk about dismantling emergency measures.
Other possible nasties include a collapse of an asset bubble in China, with potentially ruinous knock- on consequences if it forces China to start liquidating its holdings of dollar securities.
The danger is that talk of a double-dip recession will merely become self-fulfilling. A frothy stock market will start to waver, and many people will take that as their cue to rush for cover. A second leg to the downturn wouldn’t just be another dip on the jagged line: it could be cataclysmic. Governments wouldn’t have any money left to throw at it, and the banking system could crumple under the bad debts.
But for the moment, the recovery looks on track, and we are looking at a V rather than a W.
Lascelles is senior fellow of the Centre for the Study of Financial Innovation in London and a former banking editor of the Financial Times.