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June 25, 2019 | Rome, Italy

Recovery?

By | 2018-03-21T18:56:39+02:00 August 8th, 2013|"Foreign Affairs"|
Despite hopeful signs, unemployment continues blighting southern Europe, with Spain and Italy most affected.
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s the longest recession in more than a century beginning to abate? Newly released OECD data for the first quarter of 2013 seems to show that the recession peaked at the very end of last year and that a slow and painful phase of stabilization may be underway. Economic observers are beginning to say most industrialized economies will show modest growth after the summer and that the positive economic outlook should become broader and more evident in the coming year.

The bullish statements coming out of the IMF, the ECB, and European governments are even slightly more optimistic. Rather unbelievably, even Greece’s beleaguered executive is now saying that the country’s dramatic economic crisis may have topped out.

What forecasts show is very modest short-term growth, nothing like the economic expansion of the late 1970s and 1980s, which averaged more than three percent annually and was fueled mainly by falling energy prices, high deficit spending, and new technologies. Today, best-case predictions show growth rates of between one and two percent per year, well below historical highs.

Growth rates of 5+ percent, figures from another time, are destined to remain mythical numbers in Western collective memory. The economic shipwreck of recent years has left behind a vast debris field that may need a decade, if not longer, for economic systems to absorb. Unemployment will remain high across-the-board and endure indefinitely as the leading social problem faced by Western societies.

What are the roots of this as yet fragile and uncertain recovery? Not public spending, which has been largely blocked by reluctant governments, some of them obstinately opposed to the concept. One reason the recovery is so slow and uncertain is the widespread abhorrence of deficit spending. In Europe, most countries have remained within the three percent of GDP spending limit set by the Maastricht treaty. But even the United States, unconstrained by Europe’s internal limitations, has maintained deficit spending at well below seven percent of GDP, using its resources either to stabilize the financial system or for infrastructural investments. If public spending has had any impact on demand it has been modest at best — this despite the that respected economists, Joseph Stiglitz and Paul Krugman among them, have urged governments to raise expenditures.

Even Japan, where public debt stands at an astonishing 260 percent of GDP, has reined in public expenditure.

This restraint has inevitably coincided with an unprecedented fall in disposable incomes and a rise in income disparity. Final demand, last requests for payment before litigation, has fallen sharply, thus feeding the recession.

While the overall picture remains bleak, the drop-off in final demand is finally beginning to have an impact on prices, beginning with housing. The crisis in the construction industry has led to unprecedented surplus in available housing. Though there have been occasional upward swings, the supply of existing homes exceeds demand by a huge margin, making prices unlikely to rise in the near future. They may actually fall, making hosing more affordable for those with sufficient financial resources. As the recovery picks up, banks may also become more interested in underwriting mortgages, which have been stifled by the credit crunch that followed the 2007 financial crisis.

Strangely, analysts hardly ever mention another factor, namely the stabilization and decline in commodity prices. During the first decade of the century, commodity prices rose at an unprecedented rate, absorbing increasingly larger percentages of disposable income. In 2000, the average European family of four spent about 15 percent of its income on food. By 2007 the figure was 30 percent. Food costs have decreased only slightly over the last five years. Energy costs, which absorbed approximately five-to-six percent of disposable income in 2000, now absorb some 12 percent.

Over the last twelve months, however, commodity prices have weakened, and just recently began falling, albeit very slowly — the principal reason behind the (relative) optimism included in recent economic assessments. Stability and the fall in commodity prices has boosted purchasing power, albeit marginally. If they fall further, as they did in the 1980s and 1990s, the recession could end.

As for industrial products, there’s been talk of a recovery in the manufacturing sector, which may be connected with slightly higher disposable incomes and expected demand. But long-term weakness in industrial prices, typical of every recession, isn’t going away any time soon.

Paradoxically, as economies stabilize, governments may finally begin to raise expenditures. The fiscal conservatism that dominates our times may at last be replaced by expansionary policies that could strengthen the economic recovery. Even so, and under the best of circumstances, all of us have a long way to go before putting these years of dreadfulness behind us.

About the Author:

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Vittorio Jucker was the author of the column "The Economist" from its creation in 2012 to mid-2017.

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