The economy is on the mend… until the next recession

Photo: Drew Angerer Getty Images Agence France-Presse
Wall Street hit a new record Thursday, its venerable Dow Jones crossing for the first time in its history the 25, 000 points.

The stock market beats the records, the economic growth extends to the world, and unemployment is at its lowest. But for how long ?

Wall Street hit a new record Thursday, its venerable Dow Jones crossing for the first time in its history the 25, 000 points. This beautiful enthusiasm of the american stock Exchange is particularly attributed to the relaxation of the financial rules and to the recent tax cuts passed by the Congress, but above all to economic growth rates in american, european and chinese synchronized for the first time in a long time, as well as the outlook for corporate profits. The government Trump has been quick to stress that the stock markets have gained 25 % since coming to power, but the rise had begun well before, the value of the Dow Jones index has quadrupled since the darkest days of the last crisis.


Economic expansions do not die of old age, says an adage among economists. However, the u.s. economy has officially begun its exit from the last recession in June 2009, there are 103 months, which, in fact, already the third longest period of uninterrupted growth since at least the mid-Nineteenth century. It should easily go in the second rank at the end of the month of march, beating the mark of 106 months set during the boom years of the 1960s. If we believe the sixty distinguished forecasters surveyed each month by the Wall Street Journal, the absolute record of 120 months from 1991 to 2001, and we would have this time in June 2019, is also expected to be beaten, only 29 % of them saying the fear of recession in the next two years and less than half within three years.


These perspectives should not surprise anyone, say the cynics. Economists have always been better to explain the origin and logic of the underlying trend than to predict the timing and the causes of their rupture. Almost all of these experts had not seen coming the terrible financial crisis that hit the world in 2008 that they had proclaimed the previous crises.


And then, there are still a few caveats to give to this portrait. As is usually the case after a recession caused by a financial crisis, this economic recovery has long been agonizingly soft and slow in the United States as in Europe, where it was done more in the face of sovereign debt crises, not to mention the Brexit. A strong financial sector is healthier and recovery policies more consistent, the Canada first spectacularly rebounded, before experiencing a slump with the collapse in energy prices, and then find a second wind. More diversified, quebec’s economy is still better drawn.


The causes of recession


The main cause of recession in the United States is the u.s. federal Reserve, reminded us this summer in the Wall Street Journal, the economist at Princeton and former vice chairman of the Fed Alan Blinder. With the economy packages, prices and wages soar, which will force the central bank to give a strong stroke of the brake by increasing its interest rates in order not to lose the control of inflation. On this side, the Fed, like the Bank of Canada, has started to slightly lift the foot off the gas money, but all of this is done very slowly. As for the other major central banks, they still keep the pedal to the floor.


The recessions of 1973 and 1979 were caused, however, by the oil shocks. Nothing seems for the moment to announce such shocks, in spite of the crisis in Venezuela and the perpetual tensions in the Middle East, but these things are always difficult to predict.


And a stock market collapse ? All-time records in recent months, they are not too good to be true ? It would be necessary that this correction is very strong to plunge the real economy into recession, said Alan Blinder. Although the bursting of the technology bubble has melted the New York stock Exchange of one-half, and cleared about 9, 000 billion in market value in 2001, the ensuing recession lasted only eight months and caused very little damage.


If a financial disaster were to derail growth, it would be rather related to the level of indebtedness of households or businesses. This is what happened the last time, with the bursting of the housing bubble in the United States. This time, unlike in Canada, where the growing household indebtedness continues to be regarded as one of the main flaws in the economic downturn, observers would be likely to do especially for the debt of companies.


The butterfly and the elephant


This famous economic recovery from a record-long carbide is much too easy credit and interest rates extraordinarily low in order not to be fragile, wrote on Thursday, Pascal Blanque and Amin Rajan in the Financial Times. According to the Bank of international settlements, the global debt increased from 225 % of the world’s gross domestic product before the crisis to 330 % today. How to think, in this context, that at least a portion of this debt has not gone to swell the value of financial assets that are too risky, keep them artificially afloat of the State-owned chinese companies that have had to close their doors for a long time and the wealth of shareholders rather than improving the productivity of american businesses ?


Not only the global economy saw it as well on borrowed time, say Blanque and Rajan, but it also exposes the danger that an event that is normally harmless, leads to a cascade of consequences just as unexpected as fatal. The famous butterfly effect.


The fact that the policies of the central banks are still today so accommodating would leave them little ammunition to combat a possible recession, said last month The Economist. Some elected officials, including americans, may bitterly regret having wasted a significant financial room for manoeuvre “in tax cuts that are badly designed,” for businesses and the wealthy.


The economy is largely a matter of trust and behaviour are more gregarious than rational, recalls Alan Blinder. It sometimes happens that, for reasons that we do not understand that later on, businesses or consumers are suddenly inhabited by a doubt and challenge all at the same time to later on their projects, expenditures and investments. This change of attitude, says the economist, could come, for example, a nuclear threat coming from an obscure country to the East or the feeling that nothing will more at the head of a great power of the West.