|Professor Norbert Walter, chief economist of Deutsche Bank Group, scaling the peaks of Austria's Tirol Alps.
Global Economy: In recent weeks, optimism has replaced months of wintry gloom, as economic signals in several regions have turned positive and despite the reality that the shock of the worst recession since the 1930's will have long-term consequences, the sunshine wafflers have returned in force. However, there is reason to be skeptical of the commentary on economic developments that is a reprise of the mantras from some of the same people, who set the world economy on fire.
Professor Norbert Walter, chief economist of Deutsche Bank Group, says in a commentary for the German business and finance magazine Der Aktionär, that the last few months have seen a recovery in the major international stock markets – first and foremost among financial stocks. Barely has this occurred and several players – including a number of US investment bank analysts – are already in the grip of euphoria again, proclaiming economic recovery. In the opinion of these stubborn-minded people, the economy will soon grow about as dramatically as it has slumped since late summer 2008. This means they expect the economic cycle to be V-shaped. Is this excessive optimism, short-sighted wishful thinking or simply proper analysis he asks?
Walter says there are indications that the steep cyclical downturn is about to come to an end. These include the stabilisation of new order intake in manufacturing, US consumer confidence trending up again and robust consumption indicators in Germany. The first profit announcements of several banks on both sides of the Atlantic for the start of 2009 have also generated hope. Concluding from this, that the recovery is at hand, however, means the depth of the preceding slump has been blocked out.
Professor Walter says the fact that the downswing cannot continue forever after such a deep nosedive is reasonable, but it does not justify waffling on about an upturn.
He says what is more likely than a swift return to old output levels is that economic activity is now finding a floor and that this will be followed eventually by a cyclical uptrend. The cyclical development is thus more likely to be an extended U-shape. Those wanting a detailed graphic description of the current upward blip in the indicators might like to characterise the cycle as being W-shaped.
Walter says after the heavy “downstroke” we are now on a brief and modest “uptick”, which will soon – when the labour market and consumption weaken – be followed by a little “downturn”, before sometime in 2011 the real improvement and the true recovery materialises. Especially due to the depth of recession and the relatively long stagnation until early 2010, however, many people will give up on recovery hopes and will characterise the economic cycle to be more like an L-shape. He says such pessimism will, however, be just as misguided as the optimism of those who are already now kidding themselves that the upturn has definitely begun.
Professor Walter concludes: "On the question of which letters belong in the economic mix we should take urgent care that in particular the crazy investment bankers do not spoil the recipe again by adding too many Vs."