Newspaper article The Journal (Newcastle, England)

'Slow Grind' Scenario Most Likely

Newspaper article The Journal (Newcastle, England)

'Slow Grind' Scenario Most Likely

Article excerpt

THE initial "green shoots" of economic recovery have started to grow and branch out recently - much as many economists expected. This was helped by the sheer passage of time, as inventory cutting has proceeded.

But importantly, it also reflects supportive fiscal and monetary policy, which has fostered a return of confidence. In the phrase coined by economist John Maynard Keynes, "animal spirits" are back - and consequently the world has become a bit easier to understand, in that consensus forecasts of output for 2009 have now stabilised in a number of markets and are even beginning to turn upwards for 2010.

Another positive development is that the majority of high-frequency macroeconomic numbers (such as industrial production data) are now surprising analysts' forecasts to the upside - leading some observers to speculate that the end of the current recession could be only weeks away.

Yet data from the major developed markets suggest only a slow turnaround. In the United States, the decline in Q2 GDP turned out a little smaller than forecast, and Q3 growth now looks likely to be positive. The downward revisions to previous data were more important, however as they suggest that the hole the economy is climbing out of is even deeper than seemed likely a quarter ago, and that future "potential" economic growth will likely be slower than what was achieved in the decade prior to this recession.

In Europe, the UK economy's second-quarter performance was disappointing relative to expectations. Some better news came from the euro area, where the German and French economies unexpectedly expanded in Q2, but the detailed statistics did not point toward a sustainable or accelerating recovery.

Altogether, a "slow grind" scenario still appears to us to be the most likely outcome for the major North Atlantic economies. …

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