>Flash Markets (ECONOMIC RESEARCH)

Chronology of recoveries: Credit, asset markets or the real economy first?

We consider it very important to know whether, in an economic recovery, it is credit, asset prices or the real economy that recovers first. An examination of economic recoveries in the past (1992 to 1995, 2002 to 2005) shows two different chronologies: in the former case, the real economy first, then credit and asset prices; in the latter case, credit and asset prices first, then the real economy.

The current economic situation is special: in a situation of global deleveraging, it is hard to expect a recovery in credit or the prices of assets for which purchasing is credit-related; does this rule out a recovery in the real economy? The two recoveries of the past give different indications on this subject. It is also unclear whether other asset prices will recover before or
after the real economy; if they recover before it, there will be no exit strategy for central banks, which will be unable to destroy excess liquidity until it is too late. We have seen in the past that tightening of monetary policy always came last, after both the economic recovery and the recovery in credit and asset prices.

If we could know the order in which credit, asset prices and the economy will recover in the present situation, this would clarify a number of important questions:

1. Can there be an economic recovery without a recovery in credit?

Deleveraging is continuing at present (we will examine the situations of the United States and the euro zone, See Charts), and may be longlasting, because the high debt levels reached before the crisis (except for companies in the United States, See Charts) will normally take several years to come back to acceptably lower levels, given the fall in asset prices, the rise in interest rate margins on loans, higher risk aversion, etc.

The question therefore is whether an economic recovery can take place before credit picks up again.

2. Can a recovery in asset prices be expected?

We have seen in the recent period a slight recovery in:

− stock markets (See Charts);
− the prices of oil and certain other commodities(e.g. aluminium, copper, maize, (See Charts));
− credit markets (See Charts).

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