THE RECESSION – ARE WE SEEING GREEN SHOOTS OF RECOVERY?

As in all human cycles there is a beginning, middle and end. Undoubtedly, the beginning of this recession was severe and the depth of its impact was very much underestimated.

Normal economic cycles are one thing but this downturn coupled with near collapse of the world financial system resulted in the current recession, which is probably the most severe the world has experienced.

Because of globalisation and modern technology everybody is affected and it is impacting all over the globe. Economies, which were strong, are under pressure as a result of the domino effect and one of the greatest fears for world leaders is that countries will go their own way and seek to protect their own national interests, which would have a destabilising effect of the world order. A perfect example is the world of 30s and 40s (that was some mess).

Is it little wonder that the major nations are throwing everything at this Recession? USA is literally printing money in an effort to boost consumerism, create demand and get their economy going; China is buying up US debt to keep its own industry ticking over; UK is printing money and, even now, ECB is increasing the amount of cash within its system. In short, they are writing more debt on top of a situation worldwide where the level of debt is enormous but, in the meantime, they wish to stabilise their economies and then, perhaps, address the problem of debt in a more structured and rational way, maybe in 18 months time.

Green Shoots

Yes, the major nations recognise that there is a major problem and are doing something both on the monetary side but also on the financial/banking side. On the Banking side it does look as if the interventions by the major governments has unblocked the system to some extent and the credit crunch is beginning to wane. Banks are now starting to lend to each other, albeit with a government guarantee attaching. The cost of interbank lending is now almost down to pre crash levels which indicates that in terms of default risk the banks that are left standing ought to survive this mess. In US some of the big banks are returning their TARP funds (federal funding from US exchequer to tide banks over like Govt capitalization of banks here).

There has been a stock market rally over the last 2 months, which indicates that the markets agree with the direction that these policies are going in. This rally is very much fragile and no doubt that bottoms will be tested but nevertheless it is encouraging. Such rallies usually predate bottoming of recession in general economy by 6-9 months – in other words stock markets anticipate bottoming and recovery 6-9 months before actual economy.

In short, this means that one element of the forces that created this mess is responding to treatment, however, we still have a very sick patient – the general economy is not showing any signs of recovery and the likelihood is that things will get worse before they get better and will take another 6 -9 months to bottom out, by then we will see unemployment rise further and personal savings/ precautionary savings rise with less investment, contracting demand and in total further contraction of the economy.

In conclusion, we are seeing small tentative but positive signs of recovery that must give us hope. We are also seeing an acceptance of our problems (we are no longer in denial or hoping the recession will go away), this will lead to an understanding and addressing of the problems and with it will come the solutions. We are down and battered but such is the human spirit that we do have the resources to overcome these problems.

On ordinary level, situations will probably get worse before they better, more people will be out of work, more pressure on dwindling incomes, more pressures on families but let us retain hope, let us pull together, let us understand that this is not the end of the world, that tomorrow is another day and everything turns as will this recession and when we do revisit the good times let us remember the lessons that we will have learned, that the unbridled pursuit of greed has got us into this mess and that maybe we can go back to being ordinary decent people with time for their neighbours and family, instead of striving to be miserable millionaires.

Jim O Kelly QFA, CEB, BFS Jim O Kelly is executive director and sole proprietary owner of Benchmark Financial Services BMW Ltd, The Square, Ballaghaderreen. Jim Has 30 years experience in the Financial Services industry and has an Hons degree in Financial Services from UCD. Jim also holds Diplomas in Investment Advice and Wealth Management and is a member of both The Institute of Bankers in Ireland and Professional Insurance Brokers Assoc.