Turn back the clock to beat recession
Feb 9 2009 by Iain Laing, The Journal
WHEN I was pondering New Year resolutions last December, aside from the usual promises such as ‘I’ll eat more healthily’ and ‘I’ll definitely join the gym this time’, I had another thought: If everyone woke up on New Year’s Day determined to behave in the way they had before the credit crunch, the recession would disappear overnight.
Bank managers would give loans to businesses and individuals; bosses wouldn’t lay off workers; people would spend their earnings and take out mortgages safe in the knowledge that their jobs were secure.
As long as everyone kept their promise, we would be back where we were in the old days. Of course, all this is purely hypothetical and I have ignored the little problem of excess credit and leveraging, but it illustrates that behind the doom and gloom of the statistics about unemployment, mortgage lending, corporate insolvencies, consumer spending and the rest, it is the confidence of each and every individual in the economy which will determine how quickly we come out of this recession.
The Government has put an unprecedented amount into the financial system to shore up the banks in the hope they will begin lending again, but it is the multiplier effect of this money working through the system that will determine the speed at which it takes effect, and it is confidence that will determine the size of this multiplier.
It is no coincidence that Gordon Brown used his speech at Davos to call on the country to have confidence in our ability to get us through – he has recognised that no matter what action the Government takes to spend its way out of the recession, injections of public money alone will not be enough. Perhaps one of the most important indicators of falling confidence in the financial world was seen in the corporate bond market after the collapse of Lehman Brothers, when prices fell to such an extent that commentators were saying implied default rates (that is, the number of companies who would be unable to meet the payments on their debt) were at levels equal to or even worse than the depression of the 1930s.
However, prices are recovering and there have been signs of a pickup in the new issues market in recent weeks. (Dare I use the phrase green shoots?) These include heavy demand for £7bn of bonds issued by EDF, the French electricity company with more than five million customers in the UK.
Of course, it is too early to say when things will get better. Indeed economists are divided on whether we will see economic growth by 2010, but I am sure that we will be hearing more from the Government about the need to restore confidence, and judging confidence can be a good indicator for recovery in the stock market.
To quote Montek Ahluwalia of the Indian Planning Commission at Davos: “Confidence grows at the rate that a coconut tree grows, and falls at the rate a coconut falls.” We can only hope that the bamboo tree provides a better analogy for the next recovery.
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