There are signs of recovery, or at least of what Jean-Claude Trichet, the President of the European Central Bank, has described as a movement “around the deflection point”. By this he means that the decline is now declining rather more slowly. However, some of the most disturbing signs of the recession have not reversed. The high export countries, such as Japan and Germany, are still suffering badly from lack of demand for their products, though the March figures showed signs of recovery in Germany. At the beginning of the recession, the Germans thought that their export strength and balance of payment surplus would protect them against what they regarded as an Anglo-American recession. That has not occurred. In fact, it has proved impossible to maintain their previous level of exports. Economics which were more dependent on domestic demand have fared better. Germany has also suffered from their banking commitment to Central and Eastern Europe. As in 1931, loans by Austria to Hungary turn out to have been financed by loans from Germany to Austria.
Yet one still has to worry about the United States itself, despite the optimism being expressed by the Federal Reserve Board. The two obvious weaknesses of the U.S. economy are housing and unemployment. In April, new residential building in the U.S. fell to its lowest level in fifty years, dropping to an adjusted annual rate of construction of 455,000 units. Housing starts dropped by 12.8 per cent, bringing their fall for the year to 54 per cent. At the peak of the housing boom, in January 2008, housing starts reached 2.27 million; the fall from the peak is now 80 per cent, and there is no immediate sign of a recovery.
Lex, in The Financial Times, makes the rather pessimistic comment that “the U.S. housing market is still there, stubbornly refusing to improve… The trend has defeated every effort to call a bottom in the market”.
There is still a large inventory of houses available for sale, overhanging the U.S. housing market. According to the National Association of Realtors, this inventory stands at 3.7 million, equivalent to 10 months supply. On top of that there is a shadow inventory of homes which have been foreclosed by banks, but not yet put up for sale. Foreclosures themselves are still rising, by about a third, year on year. That rise is expected to continue, if only because of the rise in unemployment.
Of course, the unemployment figures themselves are lagging indicators. They will continue to rise when the worst of the financial recession is over. In the last eighteen months, U.S. unemployment has virtually doubled; it seems certain that U.S. unemployment will reach 10 per cent in the second half of 2009, and probable that the increase will continue in 2010.
These two indicators are worrying, because they interact. If unemployment continues to rise, still more houses will be repossessed, and will eventually come onto the market. House prices will continue to be weak, as banks seek to recover their loans, whether directly owned or expressed through derivatives. The banking industry will continue to depend heavily on Government injections into the money market. The sickness of the money market caused by toxic debt will remain a problem. It was the impact of the housing collapse on the banking market that created the 2009 recession, the worst recession in 50 years. Until the housing market stabilises, the money market cannot be better than convalescent; until the money market recovers, unemployment in the U.S. is likely to go on rising.
In the history of recessions, their depth and duration has been broadly proportionate to the initial impact of the shock. In the United States, the aftershocks of the Great Depression continued until 1938. The economy was finally lifted out of depression by British orders for armaments. We may well have reached the point at which the decline is decelerating, but the trends in U.S. housing and unemployment are still unfavourable. It is likely that there will be further periods of bad news, as well as rallies. We should not exaggerate the scale of recovery.
for Markets and Money