Right, I’ll see your double dip and raise you an economic black hole

Sometimes expressions that dominate common parlance serve to cloud rather than to clarify the central issues. You cannot mention the huge level of government borrowing without someone saying, "So you mean that there is a fiscal black hole?"

Actually, I don't see what is added to our understanding by colouring the hole any particular hue or by making an inappropriate association with the realm of theoretical physics. Similarly, you cannot mention the fragility of Western economies without someone saying, "So you mean that there is going to be a double-dip?" Actually, I don't think that this is a very useful way of looking at things – although the underlying issue is real enough.
The first problem with the double-dip idea is that it refers to a decline in GDP, whereas in an economy that is normally growing, even a continued increase, if it is at a glacial pace, will deliver real pain, not least to those made unemployed. For in Western economies, to keep the level of employment constant, with normal increases in productivity, GDP must grow by 2pc-3pc. To absorb increases in labour supply from immigration or other sources, or to make inroads into the accumulated levels of unemployment, GDP must grow by more than this.

The second weakness concerns time horizons. Recessions are commonly defined as two consecutive quarters of negative growth of GDP. So two quarters in which GDP declined by 0.1pc would qualify as a double dip. Perhaps we could even define a double dip as only one quarter of negative growth. Yet, either way, after such an occurrence the economy might rebound strongly. Equally, the economy might avoid a drop in output and yet growth might crawl along for years at 0.1pc per quarter, thereby causing employment to fall.
Which would be worse? The answer is surely the second scenario. Accordingly, I believe that the appropriate question to ask is not whether the economy will succumb to a double dip, but rather whether the recovery will continue to build momentum, as recoveries usually do, or whether it will subside into a period of sustained slow growth, of which a period of double dip is a special case.
That is the end of my excursion into semantics. Now the substance. To a significant extent, the answer to questions about the economic outlook divides the world into East and West. Far from threatening a double dip, much of Asia has been booming. Talk of recession there brings forth expressions of incredulity. Admittedly, some recent figures have suggested a slowdown in China, and some Western commentators get windy about an impending Chinese bust. But in general they are paying too much attention to year-on-year numbers. In fact, looked at in quarterly terms, the Chinese growth rate started to ease back in the second half of last year. In any case, if the Chinese economy did slow too much the authorities are in a very strong position to boost it again.
In Germany, booming exports to Asia are helping to boost GDP and employment. But in much of the West, it is a continuing tale of woe. Nevertheless, over recent weeks there has been transference of market anxiety from the eurozone to the US. This is not to say that eurozone worries have gone away, but that data from the US have been ghastly. Employment numbers have been weak, home sales have fallen, surveys of consumer confidence have been weak and core inflation has eased below 1pc.
What is going on? A slowdown should not have come as a surprise. The natural bounce-back from the swing in the inventory cycle and the recovery in international trade was bound to run out of steam, and at some point the stimulatory policy measures were bound to go into reverse. For all the talk about a new fiscal stimulus in the US, fiscal tightening is just starting there as the rate of crisis-induced infrastructure spending starts to fade. Meanwhile, some Bush tax cuts are set to be reversed.
There was always a chance that these pressures could be resisted if consumer and business confidence recovered enough to boost private spending, but although company finances are in good shape, the banking system remains weak. Moreover, consumer income growth is sluggish and the consumer saving ratio may need to rise further.
Over here, of course, we have all of these same pressures too. So far, the recovery has been better than almost anybody expected. But only when the cuts (and tax rises) start to bite will we see the real challenge.
Accordingly, for the UK I think that the second scenario of several years of disappointingly weak growth should be regarded as the central case. Mind you, it lacks a catchy name to compete with "double dip". Did I hear someone suggest "economic black hole"?

Roger Bootle, The Telegraph 25-07-2010

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