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Ben Bernanke wasn’t the biggest fan of labels. In 2008, the Federal Reserve Chairman asked Congress not to stick to the definition of a recession. What mattered most was the financial pain and struggles—and figuring out how it happened and what to do about it.
Given Bernanke’s previous membership of the academic body that explains the rise and fall of US expansion, his advice was jarring. It is also relevant to understanding today’s hardships. Much time has been spent on whether the American economy meets the practical definition of the R-word or whether technical aspects are most important. Does two consecutive quarters of contraction in gross domestic product justify the description, as is the case in many countries? We can always wait for the official call from the National Bureau of Economic Research, where Bernanke once served on the Committee on Business Cycle Dating. But the secretive group usually takes about a year to explain the start of a slump and rejects the two-quarters GDP metric.
Thinking about tags can be a distraction. Better to focus on the substance of the problem: a pronounced and synchronized global downdraft that shows little sign of abating. China’s economic weakness was underscored over the weekend as reports showed manufacturing was contracting again. That dashed hopes that the economy was on the mend after struggling to grow in the second quarter. Sales at top developers have fallen by more than a third from a year ago, and homebuyers are refusing to pay mortgages on some stalled projects. Beijing is desperately moving away from its growth target of around 5.5% this year. On Tuesday, Bloomberg News reported that top executives had told officials to take the number as a guide rather than an ambitious target to be met. Private sector economists thought this was fanciful for a few months.
The engine of the Eurozone, Germany, may already be in recession. With gas supplies from Russia now a big question mark, it would be unwise to expect a recovery before next year. GDP has slumped in the US for two quarters and Fed officials say they must continue to restrain the economy as the cost of curbing rapid inflation is high. The Labor Department’s Friday jobs report speaks for itself, with optimists pointing to robust job growth in June and an unemployment rate nearing a five-decade low. Skeptics point to rising weekly jobless claims and say the job market is often a lagging indicator.
Outside the US, the outlook is bleaker. The global economy is expected to grow by half of last year’s 6.1% growth, the International Monetary Fund forecasts. Not a catastrophe, and still some way from the 2.5 percent limit that the lender uses to assess whether world trade is underwater or churning. But the direction is worrying. The fund’s forecasts have been moving lower for some time, and officials are sounding gloomier almost by the month. The latest markdown, released last week, says things are likely to get worse before they get better. The march to higher interest rates that characterizes pretty much every economy – apart from rogue ones like Turkey – will take a heavy toll. The IMF believes that controlling inflation is an important prerequisite for economic stability, but does not pretend that it is free.
Bank of America Corp. Economists fear that many forecasts are too rosy. Supply chain issues are getting plenty of oxygen, but a deeper shock is the rapid tightening of policies. The estimates of economic output are flattering, the company says, and bear close resemblance to those used by monetary policymakers. “Not only are growth prospects optimistic, in virtually every economy the central bank is winning the inflation battle without a recession,” wrote Ethan Harris, global economist at BofA, in a July 29 report. “Obviously, fighting inflation is a pretty painless exercise.”
There are many reasons to worry about the global economy as a whole, rather than a series of independent fiefdoms. Too often, the first questions to officials about the existence or the opposite of a recession have a gotcha! Taste. Better to focus on the framework.
A pinch of empathy is always helpful. On July 15, 2008, when the Bear Stearns Cos. A few months old and the collapse of Lehman Brothers Holdings Inc. soon taking world finances into the abyss, Bernanke was confronted with the case by Robert Casey, a Democratic Senator from Pennsylvania, a voter who put food fourth on her list of priorities after house payments , daycare and gasoline continued. “I totally agree with you, whether it’s a technical recession or not, the combination of declining wealth, a sluggish labor market, rising food and energy prices, foreclosures, tight credit – all of these things are putting tremendous pressure on families and explain why consumer sentiment is very low,” Bernanke told the Senate Banking Committee that day. “People are very concerned. So I would certainly never say that this isn’t a serious situation, even if we weren’t in a technical recession.”
The economy was then declared in recession.
A lot of attention is also being paid to GDP, but the news there is not particularly good either. There seems to be little calm in Europe and key parts of Asia. Instead of struggling with textbook definitions or alphabetical nicknames – remember the games in 2020, whether the recovery was a U, L, V or W? – Let’s say this downdraft has a disturbing geographic consistency.
It is a cause for concern in any language.
More from the Bloomberg Opinion:
• Blame central banks for inflation? We activated it: Daniel Moss
• The Bank of England needs a Big Mac and fries: Marcus Ashworth
• Yellen’s legacy being eroded by inflation: Jonathan Levin
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Editor-in-Chief for Economics at Bloomberg News.
For more stories like this, visit bloomberg.com/opinion
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