Over the past few weeks, my occasional glances at the market reporting pages suggested that there was some positive news to be had. Markets were launching small rallies. There was a return to risky assets. The UK and Germany, among others, were turning out surprisingly positive signs of economic recovery. But upon taking a step back from the day-to-day churn of financial reporting, I have to admit I'm a bit baffled by all of this: where are these positive vibes coming from?
Although the recession probably ended (technically) in the United States sometime last summer, the global recovery - such as it is - seems remarkably fragile. Unemployment is obviously the biggest indicator. German unemployment continues to drop, but in the US the there are some 15 million unemployed, and even more who are underemployed. Nearly half of the unemployed have been off the job for 6 months or more. That's a deep hole. (More charts here)
Moreover, many of the underlying problems have not gone away. Sovereign debt concerns are still a biggy. The collapse of the Eurozone has been staved off through the promise of access to an unprecedented level of EU-backed funds for the weakest members. But most analysts agree that, as far as Greece is concerned, the can has simply been kicked down the road. Only Spain, the UK, and some Baltic states seem to be taking the necessary steps to address the underlying problems. Even there, the steps being taken should raise worry about delaying the recovery even further.
Another underlying problem is that of macroimbalances. Any movement towards re-balancing over the past two years was the result of the peculiarities of the financial crisis. We're seeing quite clearly now that the fundamental asymmetries of the global market for goods & assets have not gone anywhere. Capital flows have started returning to their pre-crisis trends. Moreover, everyone (everyone!) is talking about exporting their way out of recovery.
That is literally not possible. Where is the demand going to come from? US household wealth is low (decimated by decline in housing & job losses), consumer spending is weak, while savings will likely increase. The EU is fragile, and the best-performing country (Germany) is growing from...you guessed it: exports.
What about demand in emerging markets? The biggest, China, is currently trying to delicately apply the brakes to avoid domestic overheating and still does not have sufficient demand to offset the decline in the US/EU. Capital flows into India have slowed in recent months, which restricts their ability to fund further growth and demand. News out Japan is underwhelming.
On top of this, many of the East/Southeast Asian countries that built up their domestic currency reserves during the lead-up to the Great Recession to act as a buffer against crises will feel vindicated: they have fared relatively well. Why on earth would they change strategies now?
As noted below, the fragility of the situation is not lost on Mervyn King, head of the Bank of England. Similarly, US Federal Reserve's beige book recently described a decidedly "beige outlook" for the United States. In fact, even this morning, the estimates of US GDP growth disappointed market watchers.
The only good news I can think of is that we are not hurtling down an economic crevasse. And let's be clear: this is really REALLY good news. Catastrophe was a definite possibility a couple of months ago as observers watched the European sovereign debt problems cause the EZ to teeter on the precipice. But despite their dithering, the euro-zone economies have, for the moment, escaped the worst possible outcomes. The bank stress tests, despite widely reported weaknesses, have been met by a neutral-to-positive response. Tyler Cowen suggests that wages in Europe have been less sticky than he predicted, which seems to be prompting some signs of recovery. Another indicator of uncertainty - both for inflation and deflation - is gold. Gold is holding steady at the moment, suggesting that fear of impending doom is abated.
But if not hurtling down an economic crevasse is the best news you've got, things are still pretty grim. Taking stock of the situation from my little peephole, I have really got to ask myself: where is the recovery going to come from?
UPDATE: Some honesty from Tyler Cowen: "Macroeconomics is rarely simple... We still don't know what we are doing." Read the rest.