Great graphic that looks that the different economic cycles. L = once a recession bottoms out, a return to pre-recession output and activity will take a long time. U = the rebound will be a gradual process of expanding economic activity. V = a very rapid rebound. W = downturn followed by a sharpe recovery which then leads to a rapid downturn again – often referred to as a double-dip recession. Click here to download the image below.
A lot of media commentators think that the US is heading this way. Ben Bernanke (Chairman of the Federal Reserve Bank – equivalent to Alan Bollard at the RBNZ) is worried about this as bank credit is drying up, 10m jobs have been lost in the last 3 years, and there are a huge number of foreclosures on properties. Furthermore, it is usual that labour markets recover quickly when then is an upturn in the economy. Bernanke admitted that there wasn’t sufficient growth to rectify the labour market – unemployment is now 9.5%. Paul Krugman (Nobel prizewinning economist) said “we’ve been here before – 1937 when a return to growth in the US economy was stifled by premature increases in interest rates”. See the image below.