When will the global recession end?

Very few people accurately called the global economic recession, and to be fair we almost got there in the dot-com crash of the early years of this millennium. But now that we know that a recession is here it ought to be easier to see the way out.

What is very worrying, however, is that there is no obvious solution to the current global contraction of business in sight. Indeed, while the pace of decline has undoubtedly decelerated since last autumn the trend is still down across the board and around the world.

The financial crisis precipitated but hardly caused by the bankruptcy of Lehman Brothers has been met by a huge easing of global interest rates, massive bank rescues and stimulus packages. This has done some good.

Intensive care

The patient has been taken into intensive care and their condition stabilized. But they remain on the critical list with an uncertain prognosis and severe doubts about making a full recovery. Will they ever be the same again? Probably not, will they ever walk?

This sort of analogy has its limitations. But it does remind us that you cannot get run over by a truck and then expect to be bouncing around again within a few months. There is a long road to recovery, but nations are unlike individuals in that they do always recover, even if economic life is not as previously known.

So what does it need for the global economy to recover? In the absence of another credit boom, which seems unlikely given that the banks are so badly damaged, the alternative is some sort of Darwinian survival-of-the-fittest process as market forces return to expansion mode.

That means a scaling back of business to a sustainable level, mass redundancies and bankruptcies being a part of this process. And for governments too there will need to be big cuts in expenditure, or taxes will have to rise by too much and crowd out the recovery.

Price discovery

But eventually the price mechanism will work its miracle. Assets will be discounted to a level at which they make profits and the return of profits will start to fuel up asset valuations and business expansion.

How long it takes to get to this stage clearly must depend on how long and drawn out the downturn becomes. Government interference in the guise of bailouts may have prevented last autumn’s financial crash from becoming a collapse, but too much of a good thing might also be bad for a swift recovery.

That said a rapid recovery from such a serious global economic accident does not seem a realistic prospect, and investors betting on this happening will be among the next round of casualties from the recession.