The global economy: In search of green shoots

Whisper it quietly, but there are finally some reasons to feel more positive about the outlook for the global economy. Sean Farrell goes looking for the bottom of the recession

Wednesday 25 March 2009 01:00

Baroness Vadera, the business minister, was widely ridiculed in January for suggesting that there were signs of "green shoots" of economic recovery. Her timing was as bad as her history. The UK had just entered a recession that was worse than almost anyone had predicted a few months earlier, and the phrase had already made Norman Lamont a laughing stock when, as Chancellor, he used it to describe Britain's battered economy during the last downturn in 1992.

Lord Lamont has since pointed out that he was right at the time and that early signs of economic revival were indeed sprouting, even when things looked terrible.

This year is going to be grim and the recession will cause pain for many well past 2009 as unemployment, a lagging indicator, continues to rise.

But only a couple of months on from the Baroness's gaffe, some economists and analysts – encouraged by massive government stimulus measures – are starting to look for early buds of recovery and are daring to tentatively utter the dreaded phrase.

So, what, if any, are the reasons to be cheerful?

Shares are up

Equities markets tend to price in an economic recovery before it actually starts. The FTSE 100 index has risen to 3,911 from 3,512 since 3 March on hopes that action by the US government and greater coordination by world leaders will stabilise the financial system and get credit moving again.

The Geithner plan in the US to clean up banks' balance sheets got an unusually thumping positive response in all major markets and little of the gain was lost yesterday. Having said that, markets are extremely volatile and equities have rallied more than once before in the crisis on unfounded hopes the end was near.

Fiscal stimulus

Central banks in the UK and the US are pumping money into the economy at unprecedented levels. Even the Bank of England, ultra-cautious for the first year of the crisis, is now in the vanguard in terms of aid offered to the stricken banking sector and measures to boost the money supply. The Bank's Governor, Mervyn King, told the Treasury Select Committee yesterday that controlling inflation – the Bank's key task – was no longer a major concern and that all efforts were directed at reviving the economy.

Meanwhile in the US, the Obama administration is taking radical measures to free the banking system to add to the Fed's historic loosening of monetary policy. Doom-mongers warn of potentially dire consequences for inflation in the long run, but at some point this massive stimulus will feed through to the economy.

European revival

Activity in European services and manufacturing picked up this month, suggesting that output and orders were stabilising, figures showed yesterday. German and French activity surprised on the upside as manufacturing benefited from rising output and new orders. In services, the German purchasing managers index (PMI) rose, showing a broad improvement while business expectations rose in France. Europe remains Britain's biggest trading partner, and signs of life in the Continent's biggest economies have got to be good.

Chinese growth

The Asian giant has become a key driver of the world economy, but its growth has slumped from 13 per cent in 2007 to 6.8 per cent in the most recent quarter. While meteoric by UK standards, that level of growth is below the 8 per cent the government estimates is needed to prevent millions becoming unemployed.

The government announced further massive fiscal stimulus measures earlier this month and promises to do whatever is necessary to boost the economy.

Some economists doubt how much effect China's programme of infrastructure projects will have outside its borders, but others say that it is already taking effect and point to cargo ships once more backing up at China's ports.

Chinese demand could also be reflected in the Baltic Dry Freight index of shipping flows, which has been ticking up since early December after a collapse that began in mid-2008.

US home sales

The whole crisis started in the US housing market, so signs of life there are surely a positive. House sales rose by 5 per cent in February, the fastest pace for six years. Analysts had expected a slight fall. The news cheered US stock markets already reacting positively to the Obama administration's bailout plan. The figures followed government numbers last week showing a rebound in US housing starts and new building permits in February. The rise suggested that, as in the UK, affordability and low interest rates could finally be stirring buyer interest. Much of the activity was from people snapping up homes in distressed sales at well below the wider market rate, but you have to start somewhere.

UK property market

UK house prices are still plunging and hardly anyone expects them to bottom out before next year. But there may already be signs of life in the market. Buyer inquiries rose at their fastest pace since 2006 in February, stoked by record low interest rates, according to the Royal Institution of Chartered Surveyors. Affordability is also at a six-year high, according to Halifax.

The British Bankers' Association reported mortgage approvals up for the third month running in February, though this partly reflects the increased market share of the high street banks. Anecdotal evidence suggests that auction rooms are getting busy as investors with cash to spare try to snap up distressed sales.

Service sector

Britain's economy is heavily reliant on people and businesses spending on services, which account for about three-quarters of economic output. With credit rationed and even those with spare cash reluctant to cough up, the sector has been hit hard by a sharp fall in discretionary spending. The sector shrank again last month, but the contraction was less severe than in January.

The Chartered Institute of Purchasing and Supply also said that job cutting in the services sector seemed to be slowing, prompting hopes that the bottom for the industry was not too far away.

The wave of retail bankruptcies before Christmas seemed to spell disaster for the UK high street, but retail sales have defied gravity, remaining flat in February despite the freezing weather. However, Cips has warned that the contraction was accelerating in manufacturing and construction.

Media at bottom?

Could the worst be over for the print media? Few industries have been battered more suddenly by the downturn than the press – that most vital of sectors – after advertisers slashed budgets early last autumn. Job losses have hit the entire industry, whose revenues were already weakened by the rise of the internet. But Daily Mail & General Trust reported on Monday that, though classified advertising revenues had plunged, there were signs that the market was stabilising.

And finally

There will be more bad news along the way, but the consensus is, for the moment at least, turning to a view that things could get better sooner than expected and that Armageddon will be averted. Neil Cumming, who manages the PSigma UK Growth Fund, said: "It is too early to declare the presence of the green shoots of recovery, but the frosts are at least receding."

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