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Economic   Outlook:   A   V   or   U   Shaped   Recovery
Interviewer:   Toby   Thompson
Interviewee:    Professor   Joe   Nellis
December   2008
Hello,   my   name   is   Toby   Thompson;   I   am   here   today   with   Joe   Nellis,   Professor   of
International   Management   Economics.
Joe,   the   outlook   for   the   global   economy,   where   is   it   going   in   your   opinion?
Well   the   outlook   isn’t   good.
We   are   in   the   depths   of   a   major   recession   and   everyone   knows   that   of   course.
Where’s   it   going?
It’s   going   to   be   a   slow   recovery.
We   should   not   expect   any   significant   signs   during   2009.
We   are   hoping,   we   are   expecting,   to   see   the   green   shoots   of   recovery   perhaps   early   in
2010,   but   of   course   in   different   parts   of   the   world,   at   different   times.
So   interest   rates   –   everyone   is   very   interested   in   interest   rates   –   what   is   your   prediction   for   interest   rates   in   2009?
Gosh,   well   first   of   all   globally   they   have   tumbled   to   levels   we   have   never   seen   in   our   lifetimes.
For   example,   the   UK   rates   are   currently   2   per   cent.
They   are   the   lowest   on   record   and   they   are   likely   to   go   below   that   in   the   UK,   perhaps   to   1½   per   cent,   even   1   per   cent.
Could   they   go   lower?
Yes   they   could.
Remember   in
Japan   in   the   1990s   interest   rates   reached   zero   and   people   still   didn’t   want   to   borrow,   even   at   zero   interest   rates   although   they   paid   a   small   premium   on   top   of   that.
So   generally   in   the   Western   world   we   are   seeing   rates   right   down   2   per   cent,   1½   per   cent,   even   lower.
In   America   they   are   currently   1   per   cent.
Of   course   there   are   other   parts   of   the   world   which   have   got   higher   interest   rates.
The   emerging   markets   are   still   doing   quite   well.
So   it’s   almost   as   if   we   have   got   two   different   economies   moving   at   different   speeds,   but   low   interest   rates   are   here   throughout   2009,   after   that   all   bets   are   off.
So   what   is   the   story   with   UK   government   financing,   it   seems   to   be   a   little   bit   out   of   control?
That   is   the   understatement   of   the   century.
The   IMF   and   in   fact   Gordon   Brown   generally,   have   tended   to   feel   that   if   government   borrowing   exceeds   more   than
3   per   cent   of   GDP   that   is   not   good.
Well,   the   recent   government   pronouncements   on   spending   and   tax   cuts   mean   that   in   the   next   financial   year   their   borrowing   will   be   almost   8   per   cent   of   GDP.
Now   that   scale   of   borrowing   in   one   year   would   put   us   into   the   category   of   developing   economies,   high   risk   economies,   where   government   debt   would   be   downgraded.
In   fact   on   the   radio   this   morning,   you   may   have   heard,   that   it   would   be   cheaper   to   insure   against
McDonalds   not   paying   back   debt   than   the   UK   government   –   in   other   words,   the   market   perception   of   this   is   not   good.
We   are   now   looking   like   a   high   risk   economy   from   the   viewpoint   of   an   investor   holding   government   bonds.
So   it   doesn’t   seem   like   a   post   recession   recovery,   or   a   post   recession   period,   is

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Absolutely   not.
Remember   the   patient   is   really   quite   ill.
We   had   the   longest   period   of   positive   growth   of   any   developed   economy   in   the   world   over   the   last   fifteen   years.
We   have   had   nothing   but   growth.
Therefore   because   we   grew   so   strongly   in   some   ways   we   are   going   to   have   the   hardest   fall.
Personal   debt,   borrowing   in   general   is   one   of   the   highest   in   the   world,   in   the   developed   world,   as   a   percentage   of   our   incomes.
And   that   means   the   recovery   is   going   to   be   a   long   hard   recovery.
There   is   going   to   be   a   lot   of   restructuring   both   for   the   government   in   terms   of   finances,   that   will   take   a   long   time   to   pay   back;   corporates   in   terms   of   their   borrowing   and   their   profitability;   and   the   personal   sector   –   you   and   me   –   household   sector,   in   terms   of   our   level   of   borrowing   versus   spending.
So   it’s   not   going   to   come   any   time   soon.
I   think   the   UK   will   really   have   a   difficult   time   next   year,   and   we   will   probably   not   see   any   significant   signs   of   recovery   until   the   middle   of   2010   at   the   earliest,   and   then   it   will   not   be   a   sudden   recovery.
So   we   are   hearing   in   the   press   about   a   strange   alphabet   soup   of   ‘L’   shape   recovery,   ‘V’   graphs,   ‘U’   graphs,   ‘W’   graphs   –   what   are   all   those   things?
Very   simple.
Let’s   not   talk   about   the   ‘L’   shape   because   that   really   means   we   go   down   and   we   stay   down   for   a   long   time   –   that’s   a   great   depression   type   scenario.
Is   it   possible?
It’s   possible.
Is   it   likely?
I   am   hoping   it’s   not   likely.
‘V’   and   ‘U’   are   the   two   main   letters   that   we   are   referring   to   in   terms   of   the   path   of   recovery.
‘V’   would   be   short,   sharp   recession,   followed   by   a   quick   recovery.
That   isn’t   going   to   happen.
So   that   is   off   the   agenda.
It’s   then   a   question   of   how   flat   is   the   ‘U’   shape   recovery   and   what   I   said   I   hope   quite   clearly   is   that   yes,   we   are   falling   sharply   into   recession   and   we   shouldn’t   expect   to   see   any   significant   recovery   for   1½   to   2   years.
So   as   I   said,   middle   of   2010   at   the   earliest,   and   of   course   it’s   not   going   to   be   a   quick   jump   back   from   there.
I   think   it   is   going   to   take   several   years   of   restructuring,   particularly   in   the   banking   sector,   of   course,   in   terms   of   restructuring   their   balance   sheets.
Joe   Nellis,   thank   you   very   much.