one swallow…

Of course one swallow doesn’t make a summer, but the second quarter 2010 UK GDP figures released today show output growing at an annual rate of over 4 per cent, much higher than the consensus.

I wrote a piece for the Financial Times last summer arguing that ‘The historical evidence reveals a typical pattern of recession and recovery which suggests that, just as economic forecasters were far too optimistic about prospects for 2009 even as late as the autumn of 2008, they now seem too pessimistic about recovery profiles. Very few recessions last longer than two years. And most recoveries, once they do start, are strong.’

Focusing on recessions since the Second World War, analysis shows that for recessions with only short duration, the typical recovery pattern is rapid. The average growth rate in the year after the recession was 3.5 per cent, and in the subsequent year 3.8 per cent.

So in general once recovery starts it is strong. This is compatible with the view that short recessions are essentially inventory cycles. Once inventories are reduced to satisfactory levels, normal production levels resume, and fixed capital investment expenditures postponed during the recession are carried out.

Even in the 1930s once the recovery began – in different calendar years in different countries – the average rate of growth was strong. GDP growth in the first year after the Great Depression averaged 4.7 per cent, followed by 4.6 per cent in both the second and third years.

The caveat to all this is that the current circumstances are unusual. But so was the Great Depression. There is some evidence to suggest that, beyond a critical duration or cumulative size of recession, exit from the recession becomes harder and more sluggish. Keynes’ animal spirits become depressed. But it takes an awful lot to depress them for more than a couple of years. Capitalism seems a pretty resilient beast.

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