Why Is Determining The Depth Of Global Recession A Difficult Task?

Sometimes I was mesmerised when I read articles written by economists, politicians & policymakers. Everyone seems to be very flair with the origins of global recession & the damage it had brought about. All economics quantum receive very convincing explanation. Nevertheless, there are still 2 questions permanently left unanswered by them

Firstly, when will this economic chaos end? Secondly, what is the proper mechanism? If you manage to come across any economists who are trying convince you that the recession is going to end by 4th quarter of 2009, rest assured his guess is just as good as yours

Have we rock bottomed?

To be truthful I’m no ‘voodoo man’ or a ‘fortune teller’. I can’t really offer a definite answer. One thing for sure, predicting the depth of global recession is increasingly difficult:

(1) Recognition lags. Economists & policymakers are often too slow to realise that recession had actually worsened. This is because many of them are relying on economics indicator such as GDP data which is produced quarterly, inflation & unemployment which is produced monthly, etc before taking any deliberate action which could be little bit too late

(2) Effect lags. Once the necessary policy changes are made, the result may be contradictive. For instance, the cut in interest rates by Federal Reserve & Bank of England should be able to revive lending since costs of borrowing has fallen. But until now, there is no sign that mortgage approvals have increased. Let’s consider tax cut. In theory it should be able to increase consumption especially among those lower-middle income earners. Nevertheless, what if all those tax cut are saved rather than spent? Hence, the great difficulty comes from predicting how consumers react. Nobody knows for sure, by when consumer confidence in US is making a come back

(3) Will there be any more bailout? That’s the most interesting question, but again no one can answer with high degree of certainty. But one thing for sure, large time bailout of financial institutions like Freddie Mac & Fannie Mae, AIG & auto industry potentially cause US government more than a trillion. Same action was taken by British government to nationalise Northern Rock. Massive bailout like these is often done at the expense of taxpayers’ money. They know that in the future, governments need to balance their budget especially in time of recovery by imposing higher direct tax. This creates the incentive to be frugal. But again, depends on how consumers look at in short to medium term

(4) Protectionism in US? We will know better after the G20 summit this 2nd April. At the meantime, there is just too much of speculation. Somehow, if US were to revive the protectionist measures as outlined in the recent stimulus bill e.g. use only American made steel & buy-only American goods campaign etc, means it is triggering another trade war. We have seen the damage done in 1930s due to the Smoot-Hawley Tariff Act. All countries especially major power like EU will be the first to retaliate. Global recession will be pushed deeper

I didn't talk about implementation lags due to the nature of recession this round. Countries around the world have been quite prompt in their execution of demand management policies as most economies shrunk more than predicted. This creates sense of urgency

In a nutshell, difficulty to predict depth of global recession stems from lags & uncertainty over US economic policies