The Dead Cat Bounce

Mild signs that the rate of economic contraction is slowing in the US, China, and other parts of the world have led many investors to talk of “green shoots” of recovery, causing stock markets around the world to rally. But the emerging optimistic consensus is not supported by the facts.

NEW YORK – Mild signs that the rate of economic contraction is slowing in the United States, China, and other parts of the world have led many economists to forecast that positive growth will return to the US in the second half of the year, and that a similar recovery will occur in other advanced economies. The emerging consensus among economists is that growth next year will be close to the trend rate of 2.5%.

Investors are talking of “green shoots” of recovery and of positive “second derivatives of economic activity” (continuing economic contraction is the first, negative, derivative, but the slower rate suggests that the bottom is near). As a result, stock markets have started to rally in the US and around the world. Markets seem to believe that there is light at the end of the tunnel for the economy and for the battered profits of corporations and financial firms.

This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that while the rate of US contraction will slow from -6% in the last two quarters, US growth will still be negative (around -1.5 to -2%) in the second half of the year (compared to the bullish consensus of +2%). Moreover, growth next year will be so weak (0.5 to 1%, as opposed to the consensus of 2% or more) and unemployment so high (above 10%) that it will still feel like a recession.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

http://prosyn.org/E7mCOsN;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.