Bill Emmott - International Author & Adviser


Should We Be Pessimistic or Optimistic?
Corriere della Sera - March 29th 2009

At this stage of the global recession, should we be getting more pessimistic or more optimistic? Barely six months into the true economic shock that followed the collapse of Lehman Brothers in New York last September, it seems a surprising question to ask. Surely pessimism remains appropriate: the OECD, the Paris-based organisation that groups together 30 mainly rich European and American countries, will on March 31st announce a sharply worse prediction for its members in 2009, a contraction in GDP of 4.2%. Yet even so, there is suddenly optimism in the air.

This week, stockmarkets all around the world rose strongly; oil and commodity prices have been rising too. Meanwhile politicians on both sides of the Atlantic, led by none other than President Barack Obama, have begun to sound more cheerful, claiming they see signs that their economies might be stabilising.

My advice would be too remain rather cautious, and to let more time pass before making a judgment. There have, it is true, been some causes for optimism in recent weeks. Essentially, though, the better signs fall into three categories, none of them definitive or reliable.

The first category is of data suggesting that the pace of economic decline might be slowing: consumer spending in several countries has been better in the past month than was expected; home sales in America have begun to increase, even though prices are still falling. If these scraps of data do turn into a trend, it will indeed be good news. But a good analogy might be that of someone falling through the air. It is important at such times to know how far away the ground is. Yet even if it is nearer than you once feared, you are still going to hit it. And once you have landed, it may be no easier to get up again.

Another way of putting this is that from October until January or February the pace of decline in demand in European countries, Japan and the United States was extraordinarily fast, even frighteningly so. If that decline now slows down, it will certainly be better than if it continues at that previous pace or accelerates. A slower decline would still, however, be a decline: it could be that in this deflationary recession, in which consumer and corporate confidence has collapsed, we might now suffer from a long, slow decline in demand as unemployment rises and incomes fall. Or that the slump might stop but that recovery could take years.

The second category of optimistic evidence is the movement of financial markets. Famously, stockmarkets tend to rise in value in advance of actual turning points in the real economy. This week they rose on hope that America has at last produced a solution to its banking crisis, and on hope that economic data is stabilising. Oil and commodity prices may well have been rising in the hope that the huge fiscal stimulus package introduced in China in November is about to have an effect on Chinese demand for raw materials. The trouble is that markets can get it wrong too. Their mistaken judgments during the past four or five years are exactly what got us in the current global economic mess. So we should not take much heart from this spate of market optimism.

The third category of better news is one that fewer people talk about: this category consists of the things that haven’t happened in the past few months. Banks and insurance companies have not gone bankrupt. Industrial companies have not collapsed either. After two months of shocks in September and October last year, the financial news has become a bit quieter. This, of course, is partly because of government rescue plans, especially for the banks. But also it suggests that companies are more resilient than might have been expected. This, however, could change overnight.

The psychology of this recession is difficult to judge—especially for politicians and other government officials. It is a recession being driven by psychology: by the fear among households and of companies of potential unemployment or bankruptcy, which has led them to cut their spending, which in turn has caused demand to collapse. That sense of fear or its opposite, confidence, is a fragile thing. Politicians need to try to reassure, to prevent people from becoming too afraid. But if they sound too optimistic, too early, and then their optimism is not supported by events, their credibility will be destroyed. Caution, patience, and only moderately positive language: those must surely be the best approach, at this stage.


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