SEOUL: - The United States may emerge from recession in a technical sense as early as this summer, though a likely worsening of labour conditions means a 'depressed economy' could last as long as five more years, Nobel Prize-winning economist Paul Krugman said yesterday.
'I think it's quite possible that industrial production in the United States and perhaps in the world as a whole will bottom out some time in the next few months, that GDP (gross domestic product) growth in the US will be positive in the second half of the year and maybe a little bit later than that in Europe,' he told participants at a global financial conference.
Professor Krugman said that he would not be surprised if the US recession, which began in December 2007, ended in August or September this year. Deteriorating labour markets, however, were likely to continue into 2011, meaning 'the period of a depressed economy' could last until 2013 or 2014, he said.
Prof Krugman, who teaches at Princeton University, won the Nobel Prize in economics last year for his analysis of how economies of scale can affect international trade patterns. He also writes columns for The New York Times.
The US economy, the world's largest, contracted a worse-than-expected 6.1 per cent on an annualised basis in the first quarter. The unemployment rate hit 8.9 per cent last month and many economists expect it to reach 10 per cent by the year end.
Prof Krugman said that while economic indicators from around the world are improving, they suggest that the pace of economic decline has only slowed.
'I share the optimism that the worst of this may be over,' he said, also noting a stabilisation in financial markets. 'What's really hard, however, is to say when does this go beyond stabilisation to an actual recovery.'
On the same downbeat note, Bank of America strategists said sightings of so-called green shoots in the debt markets and economy will turn out to be no more valid than the debunked view that the US slowdown would not spread.
While US government moves to ease the flow of credit have eliminated the risk of an immediate surge in borrower defaults, weak economic growth and 'unintended consequences' of the actions will create a 'protracted credit cycle', probably with a high level of defaults till 2016, according to a report last Friday by the bank's strategists in New York.
Declining interest rates on mortgages and business loans led Federal Reserve chairman Ben Bernanke to say on March 15 that he saw 'green shoots' in some financial markets, and that the pace of economic decline 'will begin to moderate'. Other commentators have picked up on the phrase as markets rallied.
But the bank's analysts said the 'green shoots' underlying premise of a quick return to normalised credit markets and normalised earnings rests on a shaky fundamental foundation and an overly optimistic view of global economics.
Much of the improvement in credit prices since March reflects government support of specific markets, such as money markets through guarantees, and the effect on other sectors, not an improved outlook among investors.
The world must now engage in a long transition to a new source of growth after 30 years of 'debt-fuelled' US consumers driving expansion, they said.
'The price for that near-term stability is long-term below-trend growth and above-historic-norm
unemployment - the Great Recession,' they wrote. 'If that is the cost for choosing stability in some sense then the 'worst' - in the form of a protracted recovery - is still in front of us.'
ASSOCIATED PRESS, BLOOMBERG
Source: Straits Times, 20 May 2009