Duncan’s Economic Blog

Recovery and what really matters

Posted in Uncategorized by duncanseconomicblog on May 13, 2009

Much talk of recovery, ‘green shots’ and the start of the bottoming process in recent weeks and days.

Stephanie Flanders, of the BBC, had an excellent post up yesterday discussing various types of recession.

U shaped

A sharp drop followed by a period of stagnation and then recovery.

V Shaped

A sharp drop followed by a sharp recovery.

W Shaped

A ‘double dip’ recession with a second down turn.

L Shaped

The Japan scenario of a drop followed by a long period of stagnation.

The new √(square root) shaped

The computer font doesn’t do justice to this. A sharp drop, followed by a period of sharp recovery and then a gradual leveling off of growth.

FT Alphaville have also discussed a couple of other shapes in recent weeks.

The Hook shaped

Moody’s is introducing the “hook-shaped” scenario, which has the steep downturn signalled by the U-shaped scenario, but neither the steep but delayed rebound of the U scenario, nor the flat stagnation of the L-shaped scenario.

And the “diminishing sine wave.”

Which I won’t attempt to describe – go look at the picture.

Which is correct? Very hard to say. I hope, and suspect, we’ve done enough to avoid the dreaded ‘L’. I don’t think a ‘V’, in the absence of easily available credit, is that likely either.

I’m increasingly leaning towards the ‘square root’.

But, to an extent, this is all irrelevant to most people. Economic growth can come from a large variety of sources – consumption, government spending, exports, investment, etc.

Countries can experience strong growth without most people seeing the benefits. Equally economies can stagnate for years without too many ill effects on people. The Japanese economy essentially endured 15 years of almost no growth and yet unemployment was consistently below 5.5% and averaged 3.8%.

What matters to me is unemployment. Even if the economy starts growing early next year, it is unlikely that unemployment will start to fall straight away. Unemployment policy is now central to the agenda, an issue on which the Tories are very quiet.

6 Responses

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  1. Rex Harrison said, on May 13, 2009 at 2:47 pm

    Well the Tories didn’t get us into this mess.

  2. newmania said, on May 15, 2009 at 10:28 pm

    I hope, and suspect, we’ve done enough to avoid the dreaded ‘L’

    Surely that is exactly what we will get , I cannot see how chucking al oad of demand onto a dysfunctional economy will improve the underlying problems which surely have to involve resources being reallocated prompted by price, including for Labour . If you perpetuate unsustainable jobs then I would have thought the recession will go on longer . I have no idea of course but I `d say an L shape is about right .

  3. charliemarks said, on May 16, 2009 at 6:56 pm

    “If you perpetuate unsustainable jobs then I would have thought the recession will go on longer”

    But allowing unemployment to grow makes the situation even worse – the point is to reallocate production to goods and services that we need. Leaving people on the dole is expensive and wasteful, allowing workers to produce/provide makes more sense.

    The fall in the pound makes imports more expensive, perhaps in normal times this would result in a boost for domestic production in some sectors. Along with the need to reduce transport costs, this should lead to “onshore insourcing” of production for domestic markets.

    British investors have as a class sought to export more of their capital to the colonies back in the day and more recently to the “emerging markets” than invest in the domestic economy where there’s less profit to be made.

    So, I think that collective action will be required to get us out of recession speedily – if left to the capitalists, the recovery will definitely be L-shaped, as we’ve seen in Japan.

  4. newmania said, on May 17, 2009 at 7:49 pm

    if left to the capitalists, the recovery will definitely be L-shaped, as we’ve seen in Japan.

    If left to the socialists there would be no world economy to worry about in the first place and the L shaped depression of Japan was only a bad time by their standards not ours . Warping the market by pumping borrowed money into non jobs is quite obviously not the answer . It would be the answer if no-one had to make anything in the first place but in such a magical place there would be no problems at all. In the real world Labour has to move and it is notoriously unwilling to .
    Such insecurity has been omni present in the South for many years now , in the subsidised industries and the public sector the fantasy persists and we cannot afford them any more . What more why should we ? Unemployment is unavoidable it either rises a lot or a little but if we p[ersist in avoiding the issue it will eventually be evenm worse .

    This is exactly how Callaghan destroyed the mining industry and the lives of so many people . By the way the IFS have identified 7% cuts in budget so it looks as if Brown agrees with me more than you ,. Is he not left wing enough for you ?

  5. charliemarks said, on May 17, 2009 at 9:24 pm

    “Is he not left wing enough for you ?”

    He waited a decade before reluctantly nationalising the banks… I’d wait about ten minutes.


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