No double dip!

Credit Suisse säger precis rätt saker till oroliga långkalsonger. Double dips är enligt deras definition oerhört sällsynta. Hur annorlunda är dagens situation? Är det tillräckligt för en double dip denna gång?:

* True double dip recessions are so rare as to be an almost extinct
species, though you would not know it from the market chatter of recent weeks.
* To illustrate, we look at the level of US industrial production since 1884. We can only find three recessions out of 38 that seem to qualify as true double dips: one in the late 1880s, 1913/1914 and 1980-1982, though that is usually defined as two back to back recessions.
* That is no coincidence: we believe the natural forces of recovery are much stronger and more self-reinforcing than often supposed, even when unemployment and spare capacity are very high.
* Indeed, the room for recovery is especially great when the output gap is large, because this normally means private sector savings rates have recently spiked up very sharply and can fall substantially as confidence, profits and income growth rebuild.
* This is very much the case now: the private sector financial balance (households plus non-financial corporations) soared by 8% of GDP in the US during the Lehman panic, by 10% of GDP in the UK and about 4.5% of GDP in the eurozone. That is huge, and totally unprecedented in modern times.

* It is tempting - but trite - to expect a tepid recovery by focusing only on the need for public sector austerity. The excuse is that it can be very hard to predict precisely private savings behaviour, while fiscal action is usually well telegraphed. Still, overemphasizing the impact of government action simply because it is easy to forecast is lazy economics.

* Conflating slower growth momentum with a double dip won't win you the Nobel Prize either. Recoveries follow a well rehearsed rhythm, with the first burst of production growth typically very fast and the first momentum peak occurring between 6 and 15 months from the output trough.
Almost without exception.

* We think it is very possible that future recessions might occur more frequently than we have been used to, reflecting more limited scope for private and public sector debt growth. But nothing in the historic record suggests a new recession is likely now: on the contrary it suggests once recovery starts to establish itself, it is not that easy to derail.

* But history will mean nothing if some large new shock to final demand occurs very early in the recovery process: if it does the economy will likely contract again.

* So we believe the immediate issue for investors is not whether there will be a "double dip" recession but whether policy errors will
(inadvertently) create or allow a double dip "depression".

* Our view on this is very simple: it is just about possible but not very likely. Whatever populist tendencies may drive congress or members of parliament, the most senior leaders within the G-20 - and this very much includes the Chinese - are aware of the risks, and are not keen to sign a suicide note on their political future.

* For markets to be freed from the paralysis induced by fear of a low probability but extremely bad outcome, we will need to see the final shape of US banking reform (the President wants to sign this on the 4thJuly) and a viable support package for Spain (with or without use of the EFSF). More likely within weeks than months.