Friday, July 30, 2010

Double-dip recession a part of recovery process?

THE optimism that emerged in the early stages of the recovery has given way to more sobering assessments of challenges facing the global economy and its constituent national parts.

In many countries, fears have arisen of a prolonged period of slow and occasionally negative growth or, worse, of a Japanese- style 'lost decade' with multiple recessions, or, even worse, of a depression.

But are multiple downturns so unusual in periods of severe economic distress?

The global recession was severe, probably unmatched since World War II. From the start of the crisis in December 2007 to its apparent end last year, the decline in

real gross domestic product (GDP) in the United States was 3.8 per cent.

All the other G-7 economies (Japan, Germany, Italy, France, Canada and Britain) also saw severe recessions in this period. Major middle-income trading economies like Brazil, Singapore, South Korea and Taiwan saw brief but even sharper declines. The downturn was so severe, and for so long, that some used the term 'depression', before settling on 'Great Recession'.

How is a recession defined? Different national statistical agencies define, and thus date, such episodes differently. In the US, recessions are officially dated by a non-partisan, non-profit, private research institution, thus depoliticising the measurement.

The point at which the economy stops growing is called the 'peak', and the 'trough' is when it stops contracting. The period from when the economy starts to grow again until the point at which it reaches the previous peak is the 'recovery'. Growth thereafter is an 'expansion'.

For economists, a recession ends when the economy starts to grow. The economy falls to the bottom of a well, and then, as soon as it begins to climb out of it, the recession is declared 'over', even though it may be a long climb back to the top.

Little wonder, then, that ordinary citizens consider a recession over only when the economy has returned to 'normal', which means that incomes are rising and jobs are no longer desperately scarce.

A common rule of thumb is that two consecutive quarters of falling real GDP constitute a recession. But sometimes recessions don't satisfy this rule. Neither the 2001 nor the 1974-75 US recessions met that criterion. Besides real GDP, employment, income and sales are considered, as are the depth, duration and diffusion of the downturn.

Dating a recession is, at times, a judgment call. America had a brief, sharp recession in 1980, followed by a long and severe one in 1981-82. Many economists believe it was one major episode, and that is probably appropriate, in a broader context.

But the economy did indeed grow in the interim - just barely enough to consider them distinct recessions. And, since they were separated by a transition from president Jimmy Carter to president Ronald Reagan, it was politically consequential that two recessions were identified. Likewise, the recent recession was dated as starting in December 2007, but it could equally well have been dated as starting in mid-2008 because, in the interim, the economy grew.

Double-dip downturns are more the rule than the exception. If we focus on real GDP and define a double dip as a historical sequence in which a period long enough to be declared a recession is followed by recovery, and then quickly followed by a second recession, the 1980-82 period in the US is a classic example. In fact, defined more loosely as a sequence that includes periods of growth followed by periods of decline, followed by further periods of growth and decline, the 1973-75 period, with eight quarters of alternating gains and losses in real GDP, was one quadruple-dip recession.

These are not rare occurrences: About the same time, Germany saw this type of double dip and the UK a quadruple dip. In the early 1980s, Britain, Japan, Italy and Germany all had double dips. America's 2001 recession was one brief, mild double dip. Within the current recession, we have already had a double dip; a dip at the start of 2008, some growth, another long, deep dip, then renewed growth. If the economy declines again - a highly plausible prospect - the US would have a triple dip, although perhaps not an outright second recession.

So history suggests that economies seldom grow out of recessions continuously, without an occasional subsequent decline. Dips - double, triple and quadruple - have been America's recessionary experience since World War II.

While the baseline forecast seems to be slow global growth, history suggests that another decline would hardly be surprising before sustained stronger growth emerges.

The writer is professor of economics at Stanford University. He was chairman of President George H. W. Bush's Council of Economic Advisers from 1989-1993.


Source: Straits Times, 30 Jul 2010

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