Saturday, April 29, 2017

Economy: Can We Forget The Word Recession?

(Drivebycuriosity) - There is a lot talk about the next US recession, meaning two straight quarters of economic contraction (negative BNP growth).  "The U.S. is overdue for a recession", wrote CNN Money in June 2016 (cnn). "It is only a matter of time before the next recession strikes" claimed the Economist in 2015! (economist). "It`s time to start planning for the next recession", wrote FiveThirtyEight about a year ago (fivethirty). These are just some examples of recession callers (next+recession).

I think the pessimism is a response to the first decade of this century, which presented 2 nasty recessions, in 2000/01 and the 2008 crisis. I believe that this period was an exception and I think we have entered a very long recession-free period.

Some claim that recessions are a force of nature and have to come frequently. Do they?  Take a look at Australia. The economy down under has avoided a recession in 25 years (washingtonpost). The Australians are going to challenge the record, which is hold by Netherlands. The European country didn`t have a recession between 1982 and 2008.

Even the US had a long period of economic growth (nber). There was just one very mild recession in the period from 1982 though 2000: The recession from 1991 was caused by jumping oil prices  during the first Gulf War (the so-called Kuweit war). Recessions are indeed often caused by sharp  oil price hikes as you can see on the chart above (macrotrends).  A study by the Federal Reserve Bank shows that oil price shocks are the leading candidate for explaining US recessions (federal).

According to Prof. James Hamilton (University of California, San Diego) the oil price shock in 2007/2008 (as the price of oil tripled!) turned the economic slowdown into a severe recession (econbrowser): "The oil price increase over 2007:H2-2008:H1 should be regarded as a key development that turned the slowdown in growth into a recession" (archives).

I think the risk that another oil price shock will cause a new recession is much lower today.  The rise of the US oil production since 2011 - thanks to  fracking (a result of technological progress) - has changed the global oil situation fundamentally. Plenty & cheap oil from the US is flooding the global oil market and reduces the dependence from the unreliable Opec producers who have caused many of the past recessions.

There is another culprit for frequent recessions: The Federal Reserve Bank. In the past the Fed often had to break climbing inflation expectations by hiking interest rates sharply.  But, the Fed is a learning organism (as everybody) and is getting smarter over the time. Thy have learned from their past mistakes. Today the monetary authority is aware of the risk that the economy could overheat and then suddenly implodes (boom & bust) and is trying to smooth the economic development. Now the Fed is responding gradually to the rising inflation and hiking interest rates in small well dosed steps.

Otherwise has the Fed enough munition to respond to a recession. If the economy is cooling to much they can again purchase bonds (Quantitative Easing) and they could reduce interest rates below zero (negative interest rates).

My optimism is also based on strengthening tailwinds from China, India & other emerging markets. Last year China's economic growth rate has stabilized at around 6% and seems to accelerate again. This is lifting the whole world economy.  For instance Japan´s exports climbed 12% in March y-o-y, powered by exports to China, which jumped 16%. It´s becoming more and more evident that China´s continuous rise is lifting many boats.

The global economy benefits also from the technological progress. We are experiencing a new industrial revolution.  Advances in Internet, mobile computing, 3-d-printing, robotics, nano- & biotechnology and other technologies are reducing costs, raising efficiency and creating new markets. Companies are getting more efficient & more productive which further reduces the risk of a recession.

I think that the US could follow the example of Australia and may even break Netherland`s record. Recessions are still possible of course, caused by rare & unforeseen incidents, but their probability is sinking. Maybe around the year 2030 we will have almost forgotten the word recession.

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