This article was last updated on November 25
Many are calling this the worst recession since the great depression. Or, most succinctly the Great Depression 2. No doubt the news is bad and all the major economic indicators signal that growth is slowing at a quickening pace. But the question on most people’s minds is how long will this recession continue. It is getting stale to read about all the bad news making headlines everyday and it would be nice to read a positive headline like, “US economy adds 100,000 jobs“. Unlikely in the near term, but there may be some light at the end of tunnel as we enter 2009 under a new political administration.
Depending on your perspective, things could get better soon or we may not have even reached the half way point of the current downturn. As the graphic from the WSJ and NBER shows, past recessions have generally lasted anywhere from 6 months to 16 months, with the Great depression the biggest outlier at 43 months. The current recession which officially started in December 2007, has now run for 12 months. With few signs of improvement in the near term it will probably go down as one of the longer recessions in recent times, but I don’t think it will be as bad as some people are predicting. Furthermore, the recovery will be even more stunning and swift than the downturn.
My view on the current recession is that it will not be as bad as the Great depression and that we are more than half way through it. Just a few months ago people were talking about high oil prices, inflation and over valued stock markets. Suddenly, relatively speaking, all these issues have been turned on their head with oil prices crashing, deflation rather than inflation a concern now and stock markets that have fallen off a cliff. The interconnectedness of the global economy magnified the severity and speed of the economic downturn, but the same forces will also work in reverse to bring back economic growth just as fast. The keys are confidence and time for markets and people to absorb the changes being put in place by governments all over the world. Once business and consumers are confident that things are getting better (or less worse), then they will start lending, borrowing and spending more freely again which will stimulate the local and global economies of the world.
Past recessions and recoveries were mainly dependent on American consumption patterns, because of the sheer wealth of the country. Its 300 million or so citizens decided the economic fate of the world thanks to relatively large disposable incomes. However, with the emergence of BRIC (Brazil, Russia, India and China) countries and the EU things have changed and rather than 300 million people, 3 billion people now have an influence on consumption of goods and services. That is why the effects of the current recession are also heightened, but will also be the catalyst of a much faster recovery than past history suggests. With the amount of government intervention and support, it is only a matter of time before confidence in the markets returns. Once the US recovers, the world will follow and so will 3 billion consumers.