The US economy is growing more quickly than expected. The eurozone avoided a winter recession after all. In the UK, the Bank of England says the economy is showing surprising resilience.
Everywhere in the developed west the story seems to be the same. Countries are coping with the tough anti-inflationary measures imposed by central banks over the past 18 months or so. Inflation has peaked and there has been no sharp increase in unemployment. Recession fears are old news. The talk now is of soft landings across the board. Panic over.
There are two points here. The first is that it is premature to declare victory in the battle to avoid recession. Plenty of economists think the US, the UK and the eurozone will struggle to grow in the coming months as past increases in borrowing costs start to have their full effect. They point to the weakness of factory output, global trade, and money and credit as signs of trouble ahead. While supporters of the soft landing thesis stress that the US unemployment rate fell slightly to 3.5% last month, those taking a gloomier view note that new job creation has also slowed in recent months.
Krishna Guha, an economist at the investment bank Evercore, has an interesting take on what’s happening. He says the world’s biggest economy has been experiencing a rolling recession in which various sectors – housing, IT, manufacturing, services – suffer a downturn one at a time, but without the economy as a whole going backwards.
“Housing and tech went into recession first but are now troughing and rebounding, respectively. We are in the manufacturing recession, this could trough in coming months.
“By the fourth quarter, services should slip below trend as households exhaust excess savings and Fed tightening bites. But services rarely turn negative and if by then housing/manufacturing have floored, and firms hoard labour, the economy might still grow at a subdued pace.”
But the real story – the second and bigger point – is that it doesn’t really matter all that much whether the big developed economies have a soft, bumpy or hard landing. The so far unsolved question is why their collective performance has been so poor for so long, going all the way back to the financial crisis 15 years ago.
In its way, the collapse of Lehman Brothers in September 2008 was as seminal as the Wall Street Crash of October 1929. In both cases recovery was long and difficult. Jeremy Hunt, the UK’s chancellor, says the west is caught in a low-growth trap and he is right about that.
There is no shortage of explanations for the marked slowdown in growth since 2008. One is that the entire west is now affected by the problem Japan had after its asset bubble popped in the late 1980s: a period of sluggish growth in which companies that would have gone to the wall were kept going through ultra-loose monetary policy. This is the zombie theory, in which central banks in the west kept interest rates too low for too long. How many of these weak companies will survive a period of much higher interest rates remains to be seen. Not all of them, clearly.
The optimistic view is that western economies have gone through long cycles since the dawn of the industrial age in the 18th century, and this is simply the weak phase of the cycle. In the 1920s, the Russian economist Nikolai Kondratiev came up with the idea that each era of technological advance lasted for 50 or 60 years, including a boom period when a suite of inventions fully matured and a downswing when they were past their peak. There would be a tough period when the old industries were on the way out and had to be replaced by the up and coming industries of the next wave.
Seen from this perspective, the past 15 years have been a prolonged waiting game before an array of new inventions – in areas such as artificial intelligence (AI), genomics and robotics – fulfil their potential. If so, it will be a matter of time before growth rates pick up.
It’s fair to say this theory has its critics. Some doubt the existence of Kondratiev cycles at all, while others question whether the new inventions will be as transformative as those that delivered the long boom in the decades after the second world war.
But let’s assume for a moment that Kondratiev was on to something and that genomic sequencing and AI prove to be just as important as the internal combustion engine and the refrigerator were a century or so ago. Is there anything that can be done to hasten the arrival of the new upswing?
Encouraging innovation is a good place to start. In part, that means spending more on research and development, but it also means regulation that protects consumers but is not stiflingly stringent.
The state has other roles to play too. Activist industrial strategies are nothing new, even for parties of the right. Neville Chamberlain – a more successful chancellor than he was prime minister – was a pioneer of levelling up with his Special Areas Reconstruction fund to help particularly hard-hit parts of Britain during the 1930s. Getting the supply side of the economy right – infrastructure, skills, education, tax incentives – matters.
As does a business culture and insolvency system that encourages those who don’t at first succeed to have another go. Progress is not seamless; it comes through trial and error. Recognising that failure is not just inevitable but healthy is tough, but vital. The Americans understand this perhaps better than the Europeans, which is why they are likely to be the first to break out of the low-growth trap.
