Tuesday, August 24, 2010

Are we in for a double dip?

Post 547 - An interesting read in August 12th edition of The Economist: Is fear of renewed recession in America overblown? And is optimism in the resurgence of the European economy justified?

Seldom does the United States look at Europe with economic envy. The past few weeks, however, have been one of those rare phases. Concern about America’s stumbling recovery has been rising, just as anxieties about the euro area’s economy have faded. The dollar is the weakling among rich-world currencies. But Americans should take a little heart: it's too soon to despair about our economy. And Europeans should show a little caution: it's too soon to be sure that theirs is firmly back on its feet.

Some forecasters believe that America’s disappointing GDP growth in the second quarter, 2.4 percent at an annualized rate, could be the start of a slide towards a second recession. One worry is jobs, or the lack of them. American business created only 71,000 in July, too few to match the growth in the population of those of working age and far too few to shorten the queue of the unemployed noticeably. Unemployment is stuck at 9.5 percent, even though corporate America is flush with cash. Companies are still unhelpfully shy of hiring, preferring to squeeze yet more output from fewer people.

Contrast America’s woes with Europe’s renewed hope. Figures published after The Economist went to press were expected to show that the euro area’s economy grew faster than America’s in the second quarter, thanks largely to supercharged Germany. Booming sales to fast-growing emerging markets — notably Brazil, China and India — have brought German industry its strongest quarter in decades. The newly affluent in those countries are rushing to buy Audis and Mercedes, as well as luxury goods from other European countries. German firms that had mothballed factories when global demand for durable goods plummeted have returned to capacity far sooner than they had dared hope. Germany’s unemployment rate, 7.6 percent, is a bit lower than at the start of the financial crisis.

In Europe it is far too early to celebrate recovery on at least two counts. First, Germany apart, the euro area remains weak. Spain, whose economy is barely growing and where the jobless rate is 20 percent, would love to have America’s problems. Second, Germany relies on exports, not spending at home: the home market is one of the few places where sales of Mercedes cars have fallen this year. So its economic fortunes remain closely tied to the rest of the world—including one of its biggest markets, America.

How real are the risks of a double dip recession in the United States? The recovery has lost momentum in part because shops and warehouses are fuller, so that the initial boost to demand from restocking is fading. The housing bust still casts a shadow. Households must save to work off excess debts. Firms fearful of weak consumer spending are cautious about investing. Bank credit is scarce. All this stands in the way of a full-blooded recovery. But a slide into a second recession would require firms to cut back again on stocks, capital spending and jobs. The cash buffer corporate America has built up in case of harder times makes a fresh shock of that kind unlikely.

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