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Economist: V-Shaped Recovery Won't Go W-Shaped

Monday, 2 Aug 2010 | 8:22 AM ET

The chances of a double-dip recession in the developed world are very weak despite a fall in global business confidence, according to researchers at Barclays Capital.

Cash Register
Paul Sakuma
Cash Register

"In terms of global business confidence, an inflexion point seems to have been reached," Julian Callow, chief European economist at Barclays Capital, wrote.

"The key question is whether this will prove to be minor or whether the economy trends at a weaker but still positive pace or ultimately culminates in a double dip," he added.

But it would be unusual by historical standards for the global economy to return to recession so quickly, Callow said.

The only example of such a move came during the 1980s when the economy was "driven first by the imposition of credit controls plus the second oil shock, then the Volker austerity regime," he wrote.

His research also highlights the strength of corporate earnings.

"Policymakers do still have sufficient tools at their disposal, and are sufficiently well informed and pragmatic to make sensible decisions. The prospect of a second recession induced by policy error should be mitigated," according to Callow.

The world's major central banks still have scope for stimulating demand despite high debt levels, while several large emerging economies still have "substantial scope for fiscal stimulus if required" but for many emerging countries, inflation is a bigger concern than new sources of stimulus, he explained.

"For the mature economies, however, large deficits suggest that pro-active fiscal policy has reached the limits of what is possible given current public debt levels," Callow said.

"With interest rates close to the zero bound, this leaves central bank asset purchases as the main remaining stimulus tool."

The recent publication of stress test results in Europe is also a positive, according to Callow.

"Our view that Europe will be able to avoid a double dip has also been supported by the market reaction to the publication of the EU banking sector stress tests," he wrote.

"The stress test exercise has proved positive, not least because it provided a mass of detailed information on a broad swathe of banks. The tests also suggested that the capital adequacy of the vast majority of these institutions was considered sufficient," Callow added.

Contact Europe: Economy

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