Below is a very good video from CNBC that covers the main causes of recessions – overheated economy, asset bubbles and black swan events. Good analysis of soft and hard landings as well as the wage price spiral effect.
“History teaches us that recessions are inevitable,” said David Wessel, a senior fellow in economic studies at The Brookings Institution. “I think there are things we can do with a policy that makes recessions less likely or when they occur, less severe. We’ve learned a lot, but we haven’t learned enough to say that we’re never going to have another recession.” As the nation’s authority on monetary policies, the Federal Reserve plays a critical role in managing recessions. The Fed is currently attempting to avoid a recession by engineering what’s known as a “soft landing,” in which incremental interest rate hikes are used to curb inflation without pushing the economy into recession.
Below is a useful graph from ANZ Bank which looks at the breakdown of components that make up GDP in New Zealand. The GDP of a country is made up of four things: C+I+G+(X-M).
C = Private Consumption
I = Business Investment
G = Government Consumption
(X-M) = Net Exports
Notice the movement in GDP over the years with the GFC in 2008 where exports revenue brought economic growth into positive territory. However up to 2020 it was private consumption that was the most prevalent with investment. COVID-19 saw a significant downturn with consumption and investment again helping GDP. Overall, domestic demand is set to get smaller, but the exports services such as education and tourism and less demand for imports should counterbalance the lack of domestic demand – see the graph. But the RBNZ has signaled that in order to get inflation down they need the domestic economy to experience a recession (two consecutive quarters of negative GDP) with private consumption falling significantly.
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This is a very good podcast on inflation and for anyone new to the subject it explains a lot concepts in very simple language. Concepts like fiscal policy, monetary policy, recession, stagflation etc. Click link below:
The question that the economists try and answer is will the global economy go through a recession in order to get inflation down. Both central banks and governments cushioned the economic shock of the pandemic with low interest rates and spending respectively but this action has been blamed for increased inflation.
Larry Summers suggested that the US Fed had mistakenly seen the inflationary problem as transitory but there is a bit more stubbornness about price increases today. As he put it – some central banks need to go through their ‘full course of antibiotics’ (interest rate hikes) to control inflation as failure to do so means that inflation will return promptly and another course of antibiotics will need to be administered. The longer you leave it the more damaging the downturn/recession will be. He also states that every time the US economy has had an inflation rate greater than 4% and an unemployment rate below 4% the US economy has gone into a recession within two years. Those figures align with US inflation 8.5% and unemployment 3.6%.
Some great discussion and would be useful for a macro policy essay at CIE AS or A2 level. Good for revision of policies and their usefulness today.
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Below is a look at economic conditions in leading global economies. Unemployment is surprising low and with the rise in the cost of living (see inflation figures) this should put pressure on wages. The unemployment rate within the OECD area fell to 5.2% in February, the first time it has fallen below the pre-pandemic unemployment rate (which was recorded in February 2020). The unemployment rate within the OCED had peaked at 8.8% in April 2020.
Inflation, Unemployment and Interest Rates Annual inflation within the OECD area rose to 8.8% in March 2022, its highest annual increase since 1988. Energy prices have risen by over a third during the past year, while food prices have risen by ten percent within the OECD area. Most central banks have already commenced a tightening programme with the on-going threat of inflation. The Australian Reserve Bank commenced tightening their cash rate in early May, increasing the cash rate by 25 basis points to 0.35%. It is expected that the RBNZ will increase the OCR by 50 basis points next week.
Outlook If you look at conditions in the major economies you find the following:
China – limited growth potential with severe lockdowns
USA – higher interest rates could lead to a bust scenario
Euro Zone – cost of living crisis
Emerging markets – food crisis / famines.
With the indicators looking at recessionary conditions the best news for the global economy would be a withdrawal from Ukraine by Russian troops and an end to a zero-Covid strategy in China. These actions should reduce food and energy prices and therefore save government spending on raising benefits and subsidising food and energy. Economists are fairly optimistic that we will avoid a recession in 2022 as they still have the tools to stimulate if things get worse. However with no end in sight for the Ukraine conflict and interest rates on the rise a recession is on the cards.
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From Al Jazeera – Counting the Cost. Main discussion points:
Ukraine and Russia are expected to experience a severe recession this year. But the sanctions imposed on Russia and the increasing energy price can inflict inflation on other countries.
IMF to cut its growth forecast on the Global Economy.
Russia to turn to the Chinese Yuan to survive and are counties dumping the US$ as the global reserve currency?
Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on Inflation and Exchange Rates. Immediate feedback and tracked results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.
Showed this to my IGCSE class today – great video which is well put together with good examples that explain a recession and its causes. Particularly apt for today’s economic environment. Makes good use of supply and demand graphs as well as supply side and demand side variables. Detailed explanation of the business cycle. Useful for NCEA Level 2 growth standard.
Like after the GFC in 2008 can China kick start the world economy? The FT’s global China editor James Kynge explains why China’s indebtedness means it is probably both unwilling and unable to launch a stimulus package like that of 2009. A lot depends on how quickly their own economy can bounce back and if it is a L U V W shaped recovery. Also can it act as a locomotive for the rest of the world. The video below contains some excellent graphs concerning China’s debt problem.
Although from 2011 the video below from the PBS Newshour shows reporter Paul Solman and Simon Johnson – former IMF economist and now at MIT. Johnson explains the different types of recoveries – L U V W shapes.
It is unavoidable that recessions are part of the economic environment that we live in. In tackling the impact of recessions it has become apparent that one cannot solely rely on expansionary monetary policy of the central bank. Economic conditions have changed, as if an economy was to fall into recession in this low interest environment monetary policy options are far more limited than they were post the GFC. Add to this a higher debt level and you put further pressure on the banking system. A publication this year entitled “Recession Ready – Fiscal policies to stabilise the American economy.” (Published by the Hamilton Group – Washington Center for Equitable Growth) suggests that governments should assist in ensuring that the recovery phase is much quicker than it has been by ensuring confidence amongst businesses and households so they resume investing and spending again. They focus on antirecession programmes known as “automatic stabilisers.”
Automatic stabilisers are the automatic increases in revenues and decreases in expenditure in the government budget that occur when the economy strengthens, and the opposite changes that occur when the economy weakens.
Increase in GDP growth = the government will receive more tax revenues – people earn more and so pay more income tax. As it is assumed that unemployment decreases the amount of money spent on unemployment benefit decreases.
Reduction in GDP growth = lower incomes – people pay less tax. As unemployment increases the government spends more on unemployment benefits. This increase in benefit spending and lower tax collection helps to limit the fall in aggregate demand.
One of the chapters written by Claudia Sahm proposes a direct payment to individuals that would automatically be paid out early in a recession and then continue annually when the recession is severe. During a recession consumer spending (C) declines sharply – see graph – and as it makes up above 70% of most countries aggregate demand – C+I+G+(X-M) – this can lead to employment losses and reduced output. Consumers therefore are integral to boosting aggregate demand and direct stimulus payments to individuals should become part of the system of automatic stabilisers as additional income translates quickly into additional spending.
Trigger to start automatic stimulus payments.
The idea behind this is for direct payments to individuals after a 0.5% in the quarterly unemployment rate. If you look at each recession since 1970 the stimulus trigger of an increase in 0.5% unemployment meant that payments would have been triggered within three months of the start of the past six recessions (USA). But there are some concerns with using unemployment data:
Unemployment rate tends to lag the business cycle as unemployment tends to peak after the recession ahas ended.
The rise in unemployment doesn’t necessarily mean you are in recession – two consecutive quarters of negative GDP.
Lump sum v Tax cuts
There is an argument that a one-off lump sum payment is much effective in boosting spending than changes in income tax which would be spread fiscal stimulus throughout the year. Even if the Marginal Propensity to Consume (MPC) was the same for both lump sum and tax cuts it would not be until early in the next year that the full spending occurred under the tax cut option. The delay in spending from lump sum payments would be three months thus the overall stimulus boost would be both larger and more rapid – see graph below.
Final thought Direct stimulus payments would quickly deliver extra income to millions of households at the start of a recession and maintain income support until the recession has subsided. This should generate more aggregate demand and thereby reducing the impact of the recessionary phase.
Source: “Recession Ready – Fiscal policies to stabilise the American economy.” (Published by the Hamilton Group – Washington Center for Equitable Growth)
Here is another very useful video from CNBC which focuses on what actually is a recession. By definition it is two consecutive quarters of negative GDP. Between 1960 and 2007 there were 122 recessions in 21 advanced economies although those economies were only in recession around 10% of the time. The video is well worth a look and presenter Tom Chitty does a good job explaining things.
Ryan Avent of ‘The Economist’ considers how the next recession might happen — he asks the following questions:
When will the next recession be?
Where will it begin?
Is the world prepared for a recession?
What are the obstacles?
What should governments do?
Very good viewing for macro policies – Unit 4 and 5 of the CIE A2 Economics course.
With the downturn in an economy, cutting interest rates has been the favoured policy of central banks. But the use of quantitative easing (QE) might mean the end of conventional monetary policy with rates already at record low levels – by pushing rates into negative territory they are actually encouraging a deflationary environment, stronger currencies and slower growth. The graph below shows a liquidity trap. Increases or decreases in the supply of money at an interest rate of X do not affect interest rates, as all wealth-holders believe interest rates have reached the floor. All increases in money supply are simply taken up in idle balances. Since interest rates do not alter, the level of expenditure in the economy is not affected. Hence, monetary policy in this situation is ineffective.
Last Sunday there was a very good interview with Canadian economist Armine Yalnizyan on Radio New Zealand’s ‘Sunday’ Programme (with Wallace Chapman). She mentions that the neoliberal policies of the last 30 years have seen income inequality grow and the collapse of consumer spending (C) the main driver of any domestic economy. There has been an increase in the proportion of income accruing to assets which worsens inequality in many countries. China would be an economy that has relied a lot on its export sector (X) for growth but is now trying to drive domestic demand (C) to generate growth. Remember that Aggregate Demand = C+I+G+(X-M). She makes the point that corporates favour the return for shareholders rather than for example
the wages of employees.
“We have this very unusual situation here where corporations are gaining in strength for a host of reasons, similar to the type of corporate power 100 years ago, in key sectors of the economy with less ability to either tax a proportion of the profits they make or regulate their activities.”
Boosting the minimum wage is stimulatory
She also mentions an increase in the minimum wage being stimulatory with lower income groups spending a much higher proportion of their income and thereby increasing consumption. And the vast majority of this spending happens in the domestic economy – C↑. Some have talked of wage inflation by increasing the minimum wage but with the fall in trade union membership and bargaining power this has been significantly reduced. In fact we have seen wage compression.
He-cession and She-covery
However later on in the interview I was interested to her explanation of He-cession and She-covery during the interview.
Recession = “he-cession” – more men tend to become unemployed as areas that are initially impacted by the downturn are manufacturing, mining, construction etc which are likely to be male dominated.
Recovery = “she-covery”: men who lose $30 an hour jobs wince at accepting $15 an hour offers, but women grab them to make sure the bills get paid.
Last Sunday there was a very good interview with Canadian economist Armine Yalnizyan on Radio New Zealand’s ‘Sunday’ Programme (with Wallace Chapman). She mentions that the neoliberal policies of the last 30 years have seen income inequality grow and the collapse of consumer spending (C) the main driver of any domestic economy. There has been an increase in the proportion of income accruing to assets which worsens inequality in many countries. China would be an economy that has relied a lot on its export sector (X) for growth but is now trying to drive domestic demand (C) to generate growth. Remember that Aggregate Demand = C+I+G+(X-M). She makes the point that corporates favour the return for shareholders rather than for example
the wages of employees.
“We have this very unusual situation here where corporations are gaining in strength for a host of reasons, similar to the type of corporate power 100 years ago, in key sectors of the economy with less ability to either tax a proportion of the profits they make or regulate their activities.”
Boosting the minimum wage is stimulatory
She also mentions an increase in the minimum wage being stimulatory with lower income groups spending a much higher proportion of their income and thereby increasing consumption. And the vast majority of this spending happens in the domestic economy – C↑. Some have talked of wage inflation by increasing the minimum wage but with the fall in trade union membership and bargaining power this has been significantly reduced. In fact we have seen wage compression.
He-cession and She-covery
However later on in the interview I was interested to her explanation of He-cession and She-covery during the interview.
Recession = “he-cession” – more men tend to become unemployed as areas that are initially impacted by the downturn are manufacturing, mining, construction etc which are likely to be male dominated.
Recovery = “she-covery”: men who lose $30 an hour jobs wince at accepting $15 an hour offers, but women grab them to make sure the bills get paid.
David A. Rosenberg an economist with Clusken Sheff in Canada, has likened the world economy to that of a car being driven by a drunk – that is the car is moving back and across the centre line just missing the ditches on the side of the road. Currently he sees the car in the middle of the road although he questions as to whether this is due to the driver becoming more sober or steering towards the ditch on the other side.
Recently the US stock market (Dow Jones Industrial Average) went above 14000 for the first time in more than five years for the following reasons:
1. Better job figures – employers added 157,000 jobs in January and hired more workers in 2012 than had previously been thought. See chart below.
2. Corporate earnings have been stronger than expected,
3. US Federal Reserve has indicated that it will keep interest rates at near zero levels as well as continuing their policy of monthly $85 billion purchases of bonds and mortgage-backed securities, which injected $3 trillion into the banking system last week.
This third point is particularly important. In the New York Times, Rosenbery stated that he didn’t see the US economy in a recession as yet but could quickly go in that direction. “Anemic growth is my baseline scenario.” Also how long can the US Fed keep propping up equity markets and pumping money into the system? The conditions in Europe are not much better – unemployment rose to record levels in December last year and currently stands at 26.8% in Greece and 26.1% in Spain. Add to that the austerity measures which have impacted greatly on overall aggregate demand and the consumer slowdown in Germany, the eurozone area has its problems. So the car might be in the middle of the road right now but it might not take too much for it to deviate from a safe path.
Below is a graphic showing the levels of unemployment for each month since 1948 and if the economy during that time was in a recession (square in cell). Some points of note:
*In 1953 the level of unemployment was between 2-3% but the US economy was in a recession for the latter part of the year
*The majority of 1960 saw recessionary conditions with unemployment around 6-7%
*1974-75 the economy experienced stagflation – high unemployment and high inflation
*1980-83 periods of high unemployment – the early Reagan years and free market policies.
*1998-2001 – very low levels of unemployment followed by the impact of the 9/11 attacks and the recession that followed
*The financial crisis of 2008 saw 19 consecutive months of recession and unemployment reached between 10-11% in 2009. Since then it has been above 7%.
James Surowiecki of The New Yorker recently looked at the so-called rebound of the US economy. In February this year 200,000 new jobs were created and real incomes were growing also. Other indicators have been positive, for instance new car purchases have increased and the their are signs that aggregate demand is going up. But this demand is not necessarily coming from higher incomes from greater hours worked but the increasing number of young adult Americans living at home – see graph. This means that they have more income to spend on other items rather than rent/mortgage etc. In the article Surowiecki mentions data relating to the number of households.
1947 to 2007 – number of households in the US increased every year,
2008, 2010 and 2011 – number of households dropped even as the population grew.
Demographic Depression
Economist Scott Sumner came up with the expression Demographic Depression which has been a major cause of the weak recovery. The construction of new homes normally contributes greatly to the level of economic activity but when people are doubling up, there’s little demand for owning or renting. This also impact on peripheral items such as white wear items etc. However when doubling up ceases then we can say that there should be an increase in demand for housing, rentals, and white wear items. Research of past recessions shows that when unemployment falls household formation rebounds quite strongly. But global conditions and commodity prices could lead the Fed to tighten monetary policy but this would be going against what their stand of 0% interest rates to 2014.
Nouriel Roubini – New York University said in 2005 that homeowners have become too used to financing their spending by borrowing against their property. This is all very well until the value of the house declines. Today he says we are going to have further problems in the world economy in 2013/2014 when China faces the situation that the USA experienced in 2008. The world will question how solvent China is and the subsequent chaos will cause a massive global downturn – see news clip below from CNBC.
Richard Wolff (a prominent Marxist economist) – stated that in 2008 that the bursting of the housing bubble would bring about a crisis that would seriously affect American confidence in capitalism and subdue the economy for a long period of time. Shortly after saying this Lehman Brothers went bankrupt.
Here is a clip from the PBS Newshour with reporter Paul Solman and Simon Johnson – former IMF economist and now at MIT. Solman goes back two years when he interviewed Johnson about the shape of things to come in the US business cycle. Looking at today Johnson states: “So if you think about GDP, here, the story is not so bad. So we were growing up until 2007, end of 2007, early 2008, and we come down pretty sharply, and then we have some recovery. Problem is, we’re not growing fast enough, we haven’t grown fast enough to keep up with population growth. And when you adjust GDP for inflation, we’re about where we were six years ago, end of the second quarter of 2005. So it’s not a lost decade, but it’s a lost half-decade already.”
New York University Professor Nouriel Roubini predicted the 2008 Financial Crisis and is now suggesting that 2013 will be a significant year for the world economy. He makes a number of claims which allude to a major economic catastrophe:
1. There is too much public and private debt worldwide – the US is running over a trillion dollar budget deficit.
2. US unemployment figures are high (9.1%) and the indications are that it will be a this level for a few years
3. The increase in oil and food prices. This leads to less disposable income becoming available for other goods and services
4. Rising interest rates in Asia
5. The Japanese earthquake which has disrupted world trade.
6. Stocks worldwide have lost more than US$3.3 trillion since the start of May
7. China’s economy may face a ‘hard landing’- there are concerns that it will have a lot of excess capacity as world demand dries up.
Here is a clip from Inside Job that has interviews with Nouriel Roubini
A new report shows U.S. employers added 192,000 jobs in February and the jobless rate fell to 8.9 percent. Jeffrey Brown – PBS News Hour – discusses the numbers and recovery prospects with former Labor Department Chief Economist Lisa Lynch and Nariman Behravesh, chief economist at IHS Global Insight, an economic and financial forecasting company. Companies seem to have a more positive attitude to the economy and exports are on the increase. However, with oil well above $100 a barrel there are fears that this could undermine the recovery. Well worth a look.
With the increasing unease in the financial markets around the world and the contraction of many leading economies there has been a resurgence in an unfashionable word -THRIFT. Recent years has seen consumer access to an unprecedented level of liquidity and many who borrowed heavily during this period are now tempted to repay debt and behave in a more prudent manner which, over the last few years, has been seriously out of character. As governments and central banks scramble to try and stimulate spending, by the lowering of interest rates and introducing various tax reforms, does this rise in thriftiness have serious consequences to politicians worldwide? Thrift can become very threatening to a nation. One only needs to turn the clock back on the Japanese economy to realise that a near zero interest rate in the mid 1990s had little effect on a thrifty consumer. Japan subsequently experienced a period of stagnant growth. Many countries today face a similar scenario and the need to keep consumers spending in difficult times is what John Maynard Keynes called ‘the paradox of thrift’. During the 1930s depression Keynes told an audience:
The best guess I can make is that when you save five shillings, you put a man out of work for a day. Therefore, O patriotic housewives, sally out tomorrow early into the streets and go to the wonderful sales which are everywhere advertised. You will do yourselves good … and have the added joy that you are increasing employment, adding to the wealth of the country.
However, with the downturn in an economy, it is a perfectly rational response for consumers to be more prudent in their spending especially with the threat of job losses. Although this might be a rational stance for the individual, it is highly irrational for society as a whole as economic activity is reduced which ultimately leads to business failures and job losses. Therefore by increasing saving, society ends up saving less because there is less income to save from. Economists call this the ‘fallacy of composition’.
What is clear is that this recession will have a psychological effect well beyond the facts and figures of income change and unemployment. It is not about thrift or updating of a thrift ethic rather changing the way you behave. However, are the words of Freddie Mercury and Queen still extremely relevant? “I WANT IT ALL AND I WANT IT NOW.”
Last Sunday there was a very good interview with 
ECONFIX 