The Recovery Olympics

• By: Ready2invest: Jonty Crossick
• On: 16/03/2009 12:25:28
• In: Economics
• Comments: 0

Saturday is the day I reserve for any expressions of laziness that I need to vent. Reading Friday's FT and FT weekend is often a much-indulged delight. So I am always tentative about Samuel Brittan's column because it usually requires me to muster a battalion of brain cells and the internet to ensure I get to the end with my intellectual pride still in tact. But I am grateful for his 13th March entry.

In it he summarises some research on recessions, covering 122 of them in OECD countries between 1960 and 2007. The research separates credit crunch/asset price bust recessions from other recessions. Come to think of it, that's probably what Brown meant when he said he would save us from "Boom and Bust". He should have said, "I will end boom and bust unless it is a financial/property market induced bust" but it doesn't have the same ring about it. 

Of all 122 recessions, one in six was a credit crunch, one in four a house price bust and one in three an equity crash. Brittan referred to an average credit crunch lasting 2.5 years and leading to a 20 per cent decline in credit. Housing busts averaged 4.5 years and a consequent 30 per cent real price decline. The least correlation was between equity declines and recessions. He also cited oil prices as leading to recessions where output dropped on average 0.8 per cent more than in other recessions. In mid-2008 we were experiencing a credit crunch, a housing bust, an equity collapse and oil at $145 a barrel. He did not mention whether there was an average for this kind of multi-asset price busting recession. Brittan did refer to the lessening in stock market volatility which had reached paranoid highs in September 2008 but has now calmed down.

At the end of the day Brittan plumped for good homespun intuition over hyper empirical quantitative analysis and forecast that the US would recover first and that the current downturn would not last as long as we fear. I agree. Unlike other recessions, companies are not so badly run. When credit recovers, with interest rates so low, spending will recover and the worst will be over. These will not be the Austerity Olympics. They will be the Recovery Olympics.