We're not through this yet, are we? The main developed world economies, including our own, are inching forward and companies around the world are reporting a rise in demand. But the financial markets are back into panic mode, with share prices the lowest for nine months, banks becoming reluctant to lend to each other, and the weaker eurozone countries seeing their borrowing costs rising again. Is this a case of the markets doing one of their irrational blue funks? Or are they trying, in their incoherent way, to signal something more serious: that there will be another leg to the recession? Or is there something else?
There seem to be two immediate causes for the meltdown. One is a further knock-on effect from the crisis of confidence over Greece. The concerns over the national debts of the weaker European countries and the potential burden these place on the entire region have spilled over into the fear that more European banks will have to be rescued. Spanish banks in particular are under the cosh as they have lent so much to the country's property developers, but since so many European banks hold the sovereign debt of the weaker countries, the entire sector is under a cloud.
Unfortunately these fears have also affected British banks, with the result that the Government is back again with a loss on its shareholdings in the Royal Bank of Scotland and Lloyds TSB. We British taxpayers will have to wait a bit longer to get our money back.
The other trigger has been North Korea's threats against South Korea, which yesterday were ratcheted up a further notch or two. This, too, is a knock-on effect of an earlier issue, the sinking of the South Korean warship. Unless you believe that this will lead to armed conflict between the two countries it is hard to see why these concerns should be so much higher now than a couple of weeks ago. Still, to put it at its lowest, the tensions have come at a bad time for the markets.
But all this was known, at least in outline, a month ago when markets were still riding high. Perceptions may have changed, particularly with regard to the euro, but has the substance of the world recovery?
The first point to make is that economic recoveries rarely follow a straight line. It would be completely normal were there to be an interruption in growth, even a few months of decline, before the recovery is resumed. There are good reasons to expect this to happen this time, as governments correct their deficits and interest rates start to revert to normal. To take the UK, if this recovery were to follow the path of the 1980s, there would be a dip in the autumn before growth gets going again next year, and we will not be back to the peak of output reached in spring 2008 until 2012.
Nor indeed do stock market recoveries follow straight lines either. If you look at this recovery, starting from March last year, and compare it with previous ones, share prices had risen rather further and faster than the average. Or at least they had until a month ago. Now they have fallen below the average trend line. So you might simply say that whereas a month ago the markets were over-optimistic, they are now overly glum.
That "calm down, dears" reaction would be supported by the really rather encouraging evidence coming in from around the world. For example, we have just had a report from the US Conference Board that consumer confidence there has strengthened sharply; industrial orders in Europe surged in March; German exports are doing particularly well; and our own GDP for the first quarter was revised up a wee bit. Meanwhile – of course – Asia continues to drive ahead.
But if both the economic prospects and, at least viewed from a distance, the market prospects have not really changed that much, there is one thing that has changed quite radically in the past four weeks. It is the pace at which European governments will have to correct their deficits.
Whereas a month ago most European governments felt they had some time to bring down the deficits, now they know they have to move fast. The costs of not taking early action – a loss of confidence in the markets – have been shown to be much greater than the costs of taking such action. Every European government is reviewing its spending plans. Hardly a day goes by without some cut being announced or planned. Italy has become the latest country to join the line.
What no one can know is whether the boost to confidence from such action will offset the automatic loss of demand from lower spending: whether the private sector will replace the demand that is no longer coming from the public sector. But what is quite clear is that what is happening is not just a recession related phenomenon. As the region ages, Europe's whole welfare model will have to be reformed for ever.
So what is new is not the recession story; and certainly not the stock market panic. It is the questioning of something much bigger. Since European countries have reached their borrowing limits, how will they fund the social services and pensions for their ageing populations?
Ireland gets it right
It is a small cheer but a timely one. It looks as though Ireland may be pulling out of recession. The country has had about the most serious downturn of the entire eurozone. It has responded to a budget deficit comparable to that of the UK with savage cuts, starting much earlier than anyone else – right back in October 2008 – and much tougher than anything apparently contemplated here. But exports are nudging up and the fall of the euro should help the country even more. Ireland may prove that cutting spending does not condemn a country to a depression from which it cannot escape.
For further reading
The OECD Observer on deficit reduction: www.oecdobserver.org/