Why There’s Light at the End of the Tunnel

by Inya Ivkovic, MA

Key central banks are seeing light at the end of the tunnel. Most seem to agree that the global economy has hit bottom after a rather steep and extremely unpredictable slide, appearing ready to start climbing back up towards a new equilibrium. Supporting this thesis is evidence that aggressive government bailouts have reignited the frozen credit markets that threatened only short few months ago to transform the Great Recession into something much worse — the Great Depression. According to some, the turning point has been reached.

What concrete evidence supports this “turning point?” True, some economies’ GDPs have picked up the pace, while other’s GDP declines have slowed down. The free fall also appears to have ended and a period of mere contracting has been entered. The sum of these parts is creating enough of an inflection, marking the spot where the overall trend is about to make a fundamental change. And, according to central bankers of the developed world, that spot has been hit just about now.

But weren’t we warned not long ago about those same central bankers being unrealistic and far too optimistic about their countries’ economic forecasts? And haven’t we all heard their own belated realizations of just how severe and far-reaching the financial and credit crises have been, bringing the global economy to its knees? So, what has changed this time, if anything?

Apparently, a few of the celebrity bad news bears, such as George Soros, are singing a different tune as of late, along with the Organization for Economic Development and Cooperation (OEDC), which keeps track of, and makes forecasts regarding, major economies worldwide. Soros reportedly told the German daily “Allgemeine Zeitung” that “the economic free fall has been stopped” and that “the collapse of the financial system has been averted. Asia will be the first to come out of this crisis, but America is close behind.” Still, a bit of his trademark pessimism remained when he forecasted that China will take over the proverbial torch from the U.S. “as the new motor of the world economy.”

Furthermore, the OEDC has identified a handful of European economies that are now showing signs of early recovery, although most major economies, including North American ones, are still facing adverse financial and credit environments. This tells me that, despite finding reasons to believe the light can be discerned at the end of the tunnel, the situation is still very raw and still very unpredictable, which is why cautionary realism remains warranted.

Although we are still far away from sounding an “all-clear,” what we are seeing in the financial markets, as well as in the overall economy, are signs that investor and business confidence is returning. However, don’t forget that this confidence comes at a hefty price in the form of massive global economic stimuli and the unprecedented flushing of the global financial systems with public money, which may still come back and bite us all on our collective behind.

Mind you, any talk of hitting the bottom and the ensuing recovery is still in the realm of hypothesis. Don’t forget; three months ago, the markets were in dire straights, mired in doom and gloom, bracing themselves for the worst possible scenarios, including the return of the Great Depression. And the fact remains that the global economy is still in the grips of recession, and it is still contracting, although steps that have been taken appear to have moderated an almost toxic economic environment that existed not long ago.

Just because the first tentative and timid steps have been taken to recover at least some of the lost ground, it is too early to qualify them as recovery. Bear in mind that jobs, income growth, housing starts and inventories remain locked in the recessionary vortex. Perhaps we have reached the absolute worst at this point. But I would not yet put any money on that horse. I have a nasty feeling that we are still dealing with only the tip of an iceberg that could sink mere thoughts of recovery, let alone an actual turnaround.