The Ideas Exchange: Economic View - Memo to City: If Winter Comes Can Spring Be Far Behind? ; the Time to Look for an Upturn Is Just When Markets Are at Their Lowest Ebb. like Now

Article excerpt

It is time to start the hunt for that elusive prey, the turning point of the business cycle. On Friday saw a particularly resonant bout of the jitters on Wall Street. That magic moment therefore must be approaching - but only if you can keep your head when all about you are losing theirs, but make allowance for their doubting too.

The continued existence of the cycle is one of these intriguing aspects of the economic world. You would imagine that the clever people in banks, finance ministries, corporations and markets would understand enough about economics to see both booms and busts a- coming? Maybe they could not eliminate them altogether but they ought at least to be able to iron out the peaks and the troughs a bit.

But the experience of the last couple of years suggests otherwise. One bit of the world economy, manufacturing, is currently experiencing the sharpest downturn since the early 1970s. One bit of manufacturing, the hi-tech chunk, is experiencing the sharpest downturn that any significant part of the world economy has suffered since the Second World War. Sure, there have been many local commercial collapses; sure, there have been property crashes in many countries. But usually when an industry in one bit of the world is going down, somewhere else there is a bit of the same industry going up. The collapse in demand for hi-tech equipment is global.

Just why there should be an economic cycle has been the stuff of endless analysis since economists first identified cycles more than 100 years ago. The difficulty is that each cycle is different, not just in amplitude and timing but in the apparent cause. The last three downturns, in the early 1970s, 1980s and 1990s were all associated with surges in inflation, the first two triggered by a rise in the oil price, the third by asset prices in general.

This one is different: there was a surge in investment, particularly in telecommunications, with the result that the moment demand eased, companies were left with excess capacity and their cut- backs in investment exacerbated the downturn.

This was the main cause of the economic cycle in the 19th century and there was even a bit of economic theory, called the accelerator, that those of us who learnt our economics in the 1960s were taught. It was that swings in investment accelerated both the upturns and the downturns of the cycle. But then everyone became so mesmerised by swings in inflation that this theory was quietly sidelined. Central banks looked to inflation indicators to tell them that they should start to worry and when those dogs did not bark they assumed all was well.

In one sense, though, it doesn't matter. Unless policy-makers do something silly, economies are self-healing. And now is the time to look for the signs that the healing has begun. Enter Marconi. In every economic cycle there are casualties, and those casualties frequently signal that a turning point is in sight. Marconi has not collapsed but its share price, of course, has. Very often these companies return to health, though sometimes only after a financial reconstruction; witness the revival of Canary Wharf after its collapse in the last cycle.

Marconi of itself is not that important in global terms: miserable for shareholders and employees but not big enough to change the world economy. …