THE OPTIMIST
THE recession is close to an end, in our view. Markets, commentators and, for that matter, central banks, are too pessimistic about how soon recovery might start and how strong it might be. The continued improvement in the cyclical indicators, the more recognisable nature of the recession and the proportionate, or more than proportionate, policy response are reasons to be optimistic.
We have raised our growth forecasts for next year to 1.8 per cent for the UK and 1.5 per cent for the euro area. They were previously at one per cent.
The first phase of the recovery is likely to be driven by an end of the inventory rundown and a possible inventory build-up. That will buy some time – possibly a year or so – for those who need to rebuild their balance sheets. In the course of next year we would expect final demand to take over.
Our forecasts may be relatively strong, but they are in line with previous experience. A major implication of the forecast is that growth could be at levels that would normally be consistent with rising policy rates in the first half of next year. By that time, policymakers may want to withdraw some of the considerable stimulus. Ideally, that might come in the form of tighter fiscal policy, but higher rates and the reversal of unconventional measures are likely also to have to do some of the work.
Robert Barrie is head of European economics at Credit Suisse