>RUBBER BAND SYNDROME (ECONOMIC RESEARCH)

The recovery is here, within reach… But we are nevertheless going to have to differentiate between the technical factors that will temporarily boost activity data, giving the illusion of new-found growth, and the underlying trend, which is extremely fragile.

It’s like the elastic band that has been stretched too far and which sprang back when economic activity stopped hit the buffers at year-end. Just the simple upturn in production and the ratchet effects transmitted through global trade, with its internationalised chain of value-added, seems likely to generate a marked rebound in growth in the second part of the year. Not forgetting that the inventory cycle (less downsizing followed by rebuilding) could also bolster the trend by adding a supplementary spurt to output.

Our projection takes these technical factors into account, with an upwardly revised second-half growth figure, also synonymous of emergence from recession, for most industrialised countries, as early as Q3.

But if the elastic is to be stretched even further and lead to strong, self-sustained growth, we will need other traction factors on the demand side which, in our view, are likely to be missing. In other words, the underlying trends will end up by taking over to guide the global economy along a sluggish postbubble growth path, the time it takes to clean up global finance. The global reduction in indebtedness is a lengthy process that will doubly constrain private consumption, especially in countries where the credit boom erred on the side of excess. The scars of
the crisis will still be discernible in 2010, with growth rates on either side of the Atlantic far lower than those traditionally observed during a recovery phase after such a deep recession. However, given the scale of the stimulus injected into the economy, the transition to this less leveraged growth regime is very likely to be gentle and the risk of a relapse is, in our view, low, in the short-term at least.

Sooner or later, however, the fiscal and monetary drips that are artificially keeping growth going will have to be removed. The question of timetable is critical since the idea is to remove the stimulus neither too early to avoid stopping the emerging recovery in its tracks, nor too late, to avoid committing new excesses, with their potentially inflationary (real and financial) cocktail. At all events, this question of an exit strategy will preoccupy the markets over the coming months. From the monetary policy angle, central banks have two strengths to help them successfully
see this arduous task through. First, they have considerable credibility in view of the success
of their nominal anchoring policy. Second, they can talk up to guide market expectations. On the fiscal front, the field of communication currently lies fallow and the authorities’ credibility is at quite a low ebb – two vacuums which it will be necessary to try and fill, even though it is well known that it will be extremely difficult to remove the stimulus lifesupport system in a sluggish growth environment.

To see full report: PERSPECTIVES