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The Recession Has Ended And Other Surprises

By Guest contributors for CEOWORLD Magazine Updated:February 16, 2010

Neither the recession nor its end should have come as a surprise.

Lucid, clearheaded thinking is at a premium in our society. The reasons are varied and include a fascination for the arcane over the mundane, and the special over the general. Collective cognitive biases get in the way of our seeing things straight. ‘Conventional wisdom’, often flawed, clouds eyesight. Whatever the reasons, an inveterate and almost institutionalized muddleheadedness can prove horrendously costly, particularly when it obscures our view of something that affects us all deeply – the world economy.

Amid the economic boom of the years preceding the Wall street crisis of September 2008, dizzy euphoria was all-pervading. Surprisingly few people voiced concerns – at least publicly and in writing – that the zooming asset prices and plunging risk premia could sink the economy. However, signs of impending doom were in plain sight long before the full-blown crisis came to light. I had myself written on March 2nd, 2007.

“While underpriced (Cheap) risk is good for borrowers in the short term, in the long term it can undermine the health of the entire financial system. Thus there are good grounds for apprehension as to the robustness of the world’s financial markets”.

To be sure, several other hardheaded souls did issue similar admonitions, including American economists Peter Schiff and Dean Baker, Prof. Nouriel Roubini of NYU Stern and British economist Fred Harrison, based on various criteria including home prices and a decline in lending standards[i]. Of course, no one paid attention to such squeamish, spoilsport nay-saying – it would just have distracted everybody from the relentless pursuit of economic bounty.

The sanguine view of the economy persisted for an astounding nine months after the US economy went into recession (technically in December 2007). This blithe denial of reality may have gone on longer but for the Lehman Brothers collapse of September 2008, which was just too big to ignore. Instantly, reckless rapture gave way to shock and disbelief. An honest-to-goodness crisis was declared, replete with comparisons to the Crash of 1929, Great Depression etc.

I then wrote on April 16th 2009 that “the US (and world) economy will be on a strong recovery path well before the end of 2009, and there will be concrete signs of recovery as early as July “. I also listed 5 factors – all well-known and in the public domain – that underpinned this view.

This statement was at odds with the views of eminent economists and world leaders, who were prophesizing at the time that recovery wouldn’t begin before end-2009 (at the earliest) or 2010. Some including Nobel Laureate Prof. Paul Krugman were foretelling another great depression. The IMF was saying at the time that recovery would begin only in 2010.

However, the reality has proved to be far more benign. The IMF declared on July 8th 2009 that “the world economy is beginning to pull out of recession” (and echoed those words for the US economy on August 2nd ). Dr. Alan Greenspan said August 3rd that an economic recovery was under way, and that he believed “the economy began to improve in the middle of July” ! The OECD stated on September 3rd that the “global recession is coming to an end sooner than thought a few months ago and may already be over“. Dr. Ben Bernanke declared on September 16th that the recession was “very likely over” (although he cautioned the recovery would be slow). Even doom-guru Prof. Nouriel Roubini, who was warning of a double-dip recession as recently as September 14th 2009 said on October 5th that the global recession was “coming to an end” !

Remarkably, Prof. Paul Krugman who in early 2009 was predicting a second Great Depression , declared on September 21st 2009 that “the end of the world appears to have been postponed“, and that “the US recession probably ended in July or August” ! The US GDP growth figure, which had been negative for the April-June 2009 quarter and several preceding quarters, came in at a “surprisingly” positive 2.2% for July-Sep 2009. It strengthened further to a six-year high of 5.7% for the Oct-Dec quarter. The inflexion point where GDP growth turned round from negative to positive was thus most likely in July. And so in hindsight, the July 2009 date for the beginning of the recovery has proven uncannily accurate.

Of course the global economy is just out of the woods and it will be some time before a genuine, feel-good recovery is in place. The employment picture will continue to be bleak; the jobless rate (which is a lagging indicator) may languish in the 10% range throughout the Western world for a few more quarters. The blazing 5.7% growth rate for the Oct-Dec 2009 quarter is clearly not sustainable, and will settle into a more realistic rate soon.

But what’s clear from all the above is that neither the recession nor its end should have come as a surprise. The same lack of clear-sightedness that obscured the cracks in the economy when it was in full boom hid reasons for hope when the economy descended into the doldrums. The surprises happened because signals that were in plain sight were steadfastly ignored. Experts and gurus who should have heeded signs of the recession as well as the recovery largely defaulted on both. Maybe the economy was too important to have been left to the experts. Perhaps, as an eminent Harvard alumnus lamented[ii], we’ve lost too much knowledge in the cornucopia of information, and frittered away whatever shot at wisdom we may have had in the silos of our overspecialized knowledge.

And so, you often don’t need clairvoyant flair, cutting-edge competence or a crystal ball to see what’s coming – just a crystal-clear view.

[i] I had also written in August 2005, in a blog post under the title, Is it all too good to last?: “..imbalances have been accumulating in the world economy, setting up stresses which may get released in unexpected ways… the asset price bubble can burst .. Meanwhile, let us hope that we do all the right things to prolong the boom as long as possible, and cushion the fall when it comes”.

[ii] “Where is the wisdom we have lost in knowledge? Where is the knowledge we have lost in information?” - T S Eliot, Choruses from the rock, 1934.

By, Dr. V P Kochikar, Associate Vice President of Education & Research, Infosys Technologies [[INFY]], has published widely, and serves on the editorial advisory boards and review panels for several international journals and conferences. He has about 20 years of experience spanning industrial and academic research, but is convinced that his learning has barely begun.

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