ECONOMICS:Despite the first signs of economic turnaround, it may be some time yet before we notice any real effect

THE CONDITIONS that normally precipitate an end to recession – the passage of time, low interest rates and falling inflation – are now present across the globe, and most of the major economies have unveiled plans to provide additional economic stimulus via increased government spending and tax cuts. Stock markets, too, have rallied from the recent lows, adding to the scent of spring in the air.

Yet, although there are a number of indicators implying recovery is at hand, they are few and far between and most of the hard data of late has been dismal, notably in terms of global manufacturing. A clear signal that the global cycle is about to turn provides the best hope for an improvement in the outlook for the Irish economy, but the uncertainties are still pervasive enough to warrant caution on that front.

This global downturn has certainly been severe in terms of its impact and unusually long: the US tends to lead the cycle and is now in its 15th month of recession against a postwar average of 10 months. It looks set to break the existing record of 16 months, as seen in both the early 1980s and mid-1970s.

On that basis alone, one might look for signs of recovery, particularly as interest rates there are near zero and the US central bank is aggressively pursuing other more direct policies designed to boost credit growth and lower the effective cost of borrowing for households and the business sector. Yet it is testimony to the unusual nature of this recession and the impaired nature of the global banking sector that the Federal Reserve is far from confident that these measures will work in the near term, a view that helped persuade the Obama administration to provide a fiscal stimulus exceeding $780 billion, or more than 5 per cent of GDP.

In Britain, the Bank of England is also effectively printing money in an attempt to kick-start activity, having cut official rates to 0.5 per cent.

The European Central Bank (ECB) is also mulling more direct measures of influencing credit growth, although it still has room to cut interest rates further from the current 1.5 per cent.

It may take a year or up to 18 months for these interest rate changes to fully affect the economy, and some of the more unorthodox monetary measures have only been running a short time or have yet to be fully implemented. Yet one might expect consumer and business sentiment to improve in anticipation of these effects, particularly as the Obama tax cuts are due to be received by US workers over the next few months.

Evidence that activity and sentiment is improving is limited, however. Consumer spending in the US does appear to have stabilised in the past month or so, helped by a plunge in headline inflation, but this has followed six months of consecutive declines, and consumer confidence remains at historically low levels. The housing downturn, the initial catalyst for the recession, also shows few clear signs of bottoming on the demand side, and the rebound needs to be confirmed for a few more months to warrant talk of a recovery.

The scale of job losses in the US and elsewhere shows no sign of abating, moreover, and the plunge in manufacturing output of late across the major economies is extraordinary in scale. Industrial production in Germany, for example, fell by 19 per cent in the 12 months to January and this dismal statistic was then dwarfed by Japan’s 31 per cent decline, testimony to the pace of contraction evident in world trade since the autumn of 2008.

These figures, and others like them, point to another substantial plunge in global output in the first quarter of this year, following a large fall in the final quarter of 2008, and this expectation has coloured the consensus forecast for growth across the major economies in 2009; US GDP is expected to decline by 2.4 per cent, with a similar figure projected for the euro area and an even larger fall (2.7 per cent) seen in the UK.

The consensus view on the timing of the recovery has also moved out, to the final quarter of 2009 in the case of the US, and it is noticeable that many central bankers also appear to have become far more pessimistic about the near-term outlook.

History suggests that policy makers (and economic commentators) do not have a good record in calling turning points in the cycle, be it up or down, and such expectations may of course prove to be too gloomy.

More of the few positive surprises on the data front may help persuade consumers and the business sector that recovery is nearer than previously thought, although any positive data is welcome anyway when set against some of the most recent economic releases.

Dr Dan McLaughlin is chief economist, Bank of Ireland