- International institutions and economists across the world have been raising alarm bells over the global
economy slipping intorecession . - But while the collapse in economic activity is clear, there are historical examples to suggest that this is not a recession.
- Instead of a recession, we have just experienced a long, government-dictated public holiday, Bilal Hafeez of Macro Hive writes. The real test for the economy will be after it has re-opened fully.
- Bilal Hafeez spent over 20 years doing research at big banks. Read his analysis as it appeared on Macro Hive.
The International Monetary Fund (IMF) says it's the worst recession since the Great Depression. No, the worst in 300 years, says the Bank of England. And now this week, the National Bureau of Economic Research (NBER) officially called the US recession as starting in February – an unusual move because they tend to define recessions periods after the event not at the beginning. Yet while the collapse in economic activity is clear, does it really feel like a recession?
US stocks would suggest otherwise – they are almost unchanged on the year. But that could just reflect central bank support, rather than the real economy. What does the average person on the street think? Well, according to US confidence surveys, most haven't changed their expectations around jobs losses for the coming year despite the apparent depression. During previous recessions, whether the global financial crisis one, the dot-com one, or earlier ones, people's expectations around jobs would collapse (Chart 1). What has fallen dramatically is what people are hearing on the news around jobs. Positive news has collapsed.
Another common marker of a recession is that bank lending falls sharply. Why lend during a recession when businesses are shutting and people are losing their income? This time, bank lending has surged in sharp contrast to typical recessions (Chart 2). Other markers, such as people losing their houses, also haven't occurred as in past recessions.
Therefore, while the data has been terrible, the experience of most people is not that of typical recession. Most think their job prospects haven't changed much, most can still borrow, and most have kept their houses. If anything, the experience resembles an unexpected, prolonged public holiday. In fact, if we look at economic activity during prolonged breaks, we find similar collapses in economic activity.
Take August in Italy. The country tends to grind to a halt as everyone goes on vacation. But as data is seasonally adjusted, we don't see the collapse in economic activity. If we look at the non-seasonally adjusted data, we do see sharp collapses in activity (Chart 3). The same can be said about the Chinese New Year in China – as factories shut down for an extended break each year we see electricity consumption collapse (Chart 4)).
So instead of a recession, we have just experienced a long, government-dictated public holiday. The real test for the economy will be after it has re-opened fully. Only then will we see whether jobs will be permanently lost, whether banks will pull back their lending, and whether people will lose their houses. Until then, we haven't yet seen the recession.
The original piece was written by Bilal Hafeez on MacroHive. Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over 20 years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various "Global Head" roles and did FX, rates and cross-markets research.