Wolfgang Münchau's not all that optimistic even given the few positive points of data from last week. From the FT:
So you think you can see the green shoots of recovery? You draw comfort from the recent stabilisation of forward-looking indicators such as new home sales in the US? Or you think the stock market rally marks the end of the crisis? Of course, economic growth rates are bound to improve soon for technical reasons. Otherwise, not much would be left of the global economy by the end of the year.
Even if a recovery were to start early in 2010, as some optimistic forecasters believe, most of the pain of the recession is still ahead of us: unemployment and default rates will rise sharply everywhere. Most of the pain in the financial sector is also still ahead of us. This will feel like a depression long after it has ceased to be one.
I am more worried now than I was a month ago. The main problem is that the feedback loops between the real economy and the banking sector are truly scary. Remember that all the public and private sector forecasters are still busy adjusting their 2009 economic projections downwards. The latest downward revision for Germany came from Commerzbank last week, which now projects 2009 growth at a negative 6-7 per cent for this year.
At this rate of contraction, the number of private and corporate defaults is likely to increase massively beyond some of the stress-test assumptions made by the banks themselves. After the crisis caused by toxic securitised assets, the financial industry is now hit by another crisis of potentially similar magnitude. This looks to be one of the worst credit cycles in living memory.
Economists and policymakers who wonder how much it will take to recapitalise the banking sector are discovering that rescuing the banks is a much more dynamic exercise than they thought. Whatever you think it costs – and there have been widely different estimates – it is likely to end up costing you a lot more for that precise reason. The economy is trapped in a vicious circle where credit crunch and recession mutually reinforce each other.
Yes, the world needs a new, good plan. Unfortunately, as Simon Johnson explains, in my must read of the week, we're not going to get one.