The reality is, no one knows where the global economy is going at the moment.
Spring has arrived and everyone is fed up talking about the greatest depression since the 1930s. So now there are “green shoots” everywhere.
On one day last week, Bloomberg carried 118 articles and research reports from many sources in which the most durable of horticultural metaphors was deployed. They weren’t isolated cases.
“I do indeed see green shoots for the European economy,” Ewald Nowotny, a council member of the European Central Bank, said at a press conference in Vienna last week.
“We’re beginning to see some healthy signs — the stirrings of what I call green shoots,” Federal Reserve Bank of Dallas President Richard Fisher said last month.
The trouble is, most of them are nonsense. Over the next few months, you are going to hear a whole series of increasingly ridiculous and bogus signals of recovery trumpeted as if they heralded the end of the recession. All will be meaningless.
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Here’s a fool’s guide to four types of “green shoots,” all of which can be ignored by anyone trying to work out where the economy is going.
One: It’s no longer getting worse.
“The economy has continued to contract, though the pace of contraction appears to be somewhat slower,” the Federal Reserve’s Open Market Committee said in a statement last week in which it signalled that — yup, you guessed it — the emergence of all those “green shots” meant it didn’t have to do much more to stimulate the economy. So, to get this straight, the economy is still falling off a cliff, only not falling quite so fast as it was a few months ago. It is, however, still getting smaller, which means everyone is getting poorer. At the risk of spoiling everyone’s fun, there is a big difference between that and the economy actually starting to recover.
Two: We applied the medicine, so stop complaining.
“I am confident that the innovative policies being pursued by the Federal Reserve will facilitate and, indeed, expedite the recovery process,” said the Fed’s Fisher in the same speech in which he forecast the healthy emergence of those “green shoots.” It is pretty much the same message pumped out by central bankers around the world: We have cut interest rates, printed money and pumped up demand. We have a computer in the basement that says when you do all of those things, the economy will start to recover. There is just one snag: What if you have the wrong diagnosis and the wrong cure? Just applying the medicine doesn’t tell us anything, and certainly not that the patient is about to get up and start walking again.
Three: The stock market says so.
Indeed it does. The markets aren’t so much spotting “green shoots” as a whole flowerbed of roses and tulips. Europe’s Dow Jones Stoxx 600 Index has erased all its losses from the early part of the year and shows every sign of kick-starting a new bull market. It climbed 13 per cent in April, the biggest monthly gain since data for the index started in 1987. Most other major markets around the world have staged similar rallies.
“All the things are in place for the bear market to have ended,” Anthony Bolton, president of investments at Fidelity International, said in an interview.
Again, there’s a snag: The stock market doesn’t have any more of a clue about what will happen than the rest of us. It has predicted at least 12 of the last two recoveries, and nine of the last five recessions, to paraphrase economist Paul Samuelson. One consequence of the credit crunch is that we should stop believing the markets are much good at predicting anything. After all, they didn’t see the blow-up in the markets, and that was happening right under the noses of professional investors. There’s no point in imagining the same people can spot a recovery now.
Four: Business leaders are more optimistic.
Some of the most respected names in business are blooming with confidence. Those “green shoots” are “turning into daffodils,” Goldman Sachs Group Inc Chief Economist Jim O’Neill said in an interview last week, after raising his forecast for global growth next year.
Consumers want to “move on” from the economic decline, said Stuart Rose, chief executive officer of UK retailer Marks & Spencer Group Plc, as if the recession were just some tiresome psychological condition we could just snap out of.
Ignore them. Business leaders are perennially optimistic. It is part of their job. To get to the top of a big company you have to be constantly “breaking new ground,” “pushing the envelope” and “taking things to the next level.” The gloomy realists don’t make it to the board — even though, of course, they are often right.
The reality is, no one knows where the global economy is going at the moment. We are living through the worst recession since World War II, but much has changed since then. It’s time those “green shoots” were “nipped in the bud.” To deploy a simile from a different part of the garden, “we’re not out of the woods yet.” And we won’t be for a long time.