A triple-dip recession in the Eurozone is now a distinct possibility. This column argues that additional monetary stimulus is unlikely to be effective, that the scope for further fiscal stimulus is limited, and that some structural reforms may actually hurt growth in the short run by adding to disinflationary pressures in a liquidity trap. The author advocates using tax incentives and tighter regulations to encourage firms to replace environmentally inefficient capital.
Against the background of lacklustre global demand, economic growth in Europe has weakened again. In the Eurozone, a third recession in less than seven years is a distinct possibility. Yet economic policy looks powerless. On the monetary side, although the ECB may still embark on a genuine programme of quantitative easing, such action is unlikely to deliver a major boost because the benchmark 10-year government bonds already yield just 1%.
Italian growth: New recession or six-year decline?
Jeffrey Frankel11 August 2014
The Italian economy is reported to have slipped back into recession in the first part of 2014. This characterisation is based on a criterion for a recession standard in Europe – two successive quarters of negative growth. However, there are other criteria to define a recession. US standards would treat Italy’s economic situation as one, six-year-long recession. Whereas one cannot say whether one criterion is superior to the other, announcing a recession has further implications.
Italians and the world have now been told that their economy slipped back into recession in the first half of 2014. This characterisation is based on the criterion for recession that is standard in Europe and most countries – two successive quarters of negative growth. But this is not the only way to identify recessions.
Various stimulus programmes have been implemented in a response to the decline in consumption of durables since the Recession. This column argues that standard analysis of such programmes could be overstating their effectiveness. Aggregate durable spending is much less responsive to stimulus during recessions. Microeconomic frictions lead households to adjust their durable holdings less frequently.
Over the course of the Great Recession, purchases of new vehicles and other consumer durables fell by $153 billion. Purchases of new homes and other forms of residential investments declined by more than $260 billion. All-told, declines in broadly defined durable spending accounted for more than half of the total decline in GDP during the Recession.
The CEPR Business Cycle Dating Committee recently concluded that there is not yet enough evidence to call a business cycle trough in the Eurozone. Instead, the committee has announced a 'prolonged pause' in the recession. This Vox Talk discusses the possible directions that this situation could lead to and questions whether the Great Recession has harmed the Eurozone’s long-term growth prospects to the extent that meagre growth could become the 'new normal'.
The simplest business cycle dating algorithm declares recessions over after two consecutive quarters of positive GDP growth. By that metric, the Eurozone recession has been over since 2013Q1. This column argues that growth and improvements in the labour market have been so anaemic that it is too early to call the end of the Eurozone recession. Indeed, if this is what an expansion looks like, then the state of the Eurozone economy might be even worse than economists feared.
The CEPR Business Cycle Dating Committee met on 11 June 2014 to determine whether the Eurozone is out of the recession that started after 2011Q3. The duty of the Committee – comprised of Philippe Weil (Chair), Domenico Giannone, Refet Gürkaynak, Monika Merz, Richard Portes, Lucrezia Reichlin, Albrecht Ritschl, Barbara Rossi, and Karl Whelan – is to date peaks and troughs of the Eurozone business cycle, marking recessions and expansions – a role similar to that of the NBER Business Cycle Dating Committee in the US.
Reconciling Hayek's and Keynes' views of recessions
Paul Beaudry, Dana Galizia, Franck Portier01 June 2014
Hayek viewed recessions as working out excessive investments; Keynes viewed them as demand shortages. This column argues that they may not be as mutually exclusive as many think. Recessions may reflect periods of liquidation but this may be associated with inefficient adjustment involving unemployment and precautionary savings. Stimulative policy may be desirable even if it delays the full recovery.
There remains considerable debate regarding the causes and consequences of recessions. Two views that are often presented as opposing, and which created controversy in the recent recession and its aftermath, are:
Tackling long-term unemployment: The research evidence
Barbara Petrongolo27 April 2014
Long-term unemployment in the UK increased substantially after the recent recession. Many policy interventions have attempted to address this problem. The UK’s long-term unemployed face tougher requirements in return for their benefits – community work, training programmes, or daily visits to the Jobcentre. This column tries to assess the likely success of the UK government’s strategy by surveying the effectiveness of the ‘sticks’ and ‘carrots’ of active labour market policies.
During the Great Recession, UK unemployment increased from about 5% to 8%, with a disproportionate increase in the number of long-term unemployed. Of the nearly 2.5 million people who are currently unemployed, more than a third have been out of work for over 12 months (up from a fifth at the start of the recession), and a fifth have been out of work for over two years. The rising incidence of long-term unemployment is a distinctive feature of virtually all recessions, as job-finding rates tend to remain persistently low even after the first signs of a recovery.
From recession to normalcy: Recoveries as a third phase of the business cycle
Antonio Fatás, Ilian Mihov14 August 2013
The last recession in the US ended in June 2009. Yet, three years on, unemployment remains high. This column argues that we need to better understand how business cycles of recession and expansion work. Detailed evidence from the US suggests that recoveries are not simply mirror images of recessions. Because of its policy relevance, economists and policymakers must acknowledge that the pattern of recession/recovery has significantly changed over the last half century.
According to the NBER business cycle dating committee, the last recession in the US ended in June 2009 (NBER 2013). Three years later US unemployment remains high and most estimates suggest that output remains below potential; a pattern also present in other advanced economies. As a result, central banks have made explicit commitments to keep interest rates at low levels until the recovery is firmly established, referring to a future date when the economy is close enough to ‘normal’.
A ‘self-fulfilling recession’ is a long-established idea in economics. This column argues that the US’s economic malaise continues to be caused by leaders’ hysteria rather than by actual engrained economic problems. Obama and Congress need to stop scaring the nation about the ‘fiscal cliff’ because, ultimately, they are coordinating expectations on there being a recession. Tackling the right policies now, and sending out the right message, will help more than hysteria.
Imagine that you are an employer. Every day you hear, “the economy’s going over a fiscal cliff. Tax hikes and spending cuts totalling $600 billion will kill the economy”. Everyone is saying it - the politicians, the media, the economists, the Fed, the CBO, the IMF. So it must be true. Sure, the Republicans and Democrats may make a deal and save the day. But these guys never agree and, meanwhile, economic doomsday - January 1st - is just weeks away.
Have the US and European economies parted company? The signals are increasingly clear
Lucrezia Reichlin, Domenico Giannone, Jasper McMahon, Saverio Simonelli02 May 2012
According to official statistics, the UK and Europe are heading for recession, while the US is recovering. This has led some to suggest that European economies are moving in the opposite direction to the US. This column, written by the co-founders of Now-Casting, presents new now-casting estimates that put Europe and the US even further apart.
According to the NBER (2012), the last recession ended in June of 2009. CEPR (2012) dates the end of the recession in the Eurozone in the same quarter. For the UK, there is no established chronology but a visual inspection of Figure 1 shows that the recession and the subsequent recovery in the three economies have been highly synchronised.