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IT’S not official but it has begun. The United States is now in
recession.
The prestigious Economist magazine points to
signs of recession in the world’s largest economy—a jump in the
unemployment rate to 5.1 percent and the loss of 98,000
private-sector jobs in March, the fourth consecutive month of
decline; surveys of manufacturing and services, and Federal Reserve
Chairman Ben Bernanke admitting on April 2 that output was unlikely
to “grow much, if at all, over the first half of 2008 and could
even contract slightly.” Since December, the US economy has lost
about 80,000 jobs a month. In a full blown recession, job losses
will be twice that.
The usual definition of a recession is two
consecutive quarters of decline in economic output. That has not
taken place. On Feb. 14, when I interviewed her, President Arroyo
said the US was not yet in recession, using the classic definition.
At that time, though, the rice crisis was not yet apparent. Arroyo
had thought she would pump-prime the economy with infra spending to
cushion the Philippine economy from a US slump.
However, the US National Bureau of Economic
Research (NBER)—defines a recession as “a significant decline in
economic activity spread across the economy, lasting more than a few
months, normally visible in real GDP, real income, employment,
industrial production and wholesale-retail sales.” Using this
criteria, many economists, including those with the Economist,
believe the US is now in recession.
The question then is: How long will the
recession last? Albay Gov. Joey Salceda believes the US slowdown
will be short and sharp. He thinks if the Philippines grew by 7.3
percent in 2007, it will grow by between 5 and 6 percent this year,
a drop of two percentage points at worst because of a US slowdown.
Government economists project GDP growth rate of 6.3 to 7 percent
this year.
The Economist is surprised that the slowdown
“seems remarkably gentle, given that many think America is
suffering its worst financial shock since the Great Depression.”
It predicts that the “labor market will surely
worsen as firms cut back in the face of weaker consumer spending.
But a buoyant world economy is still boosting American exports; a
fiscal stimulus is on the way; real interest rates are around zero
and likely to fall further; and, with the rescue of Bear Stearns,
the Fed has given an implicit guarantee to Wall Street. So few
forecasters expect outright slump. A liberal enough loosening of
fiscal and monetary policy can stop recession turning into
depression, and American policymakers have left little doubt that
they will use their recession-fighting weaponry freely.”
In the Philippines, Filipinos are not as
concerned with a US recession as they are with vanishing rice stocks
and rapidly rising prices of basic commodities—rice, corn, pan de
sal, LPG, canned goods and vegetables.
Former Finance Secretary Cesar Virata, in my
talk to him, estimates inflation this year to be hitting 12 percent.
In 2007, headline inflation was hitting 4.9 percent while bank
lending rate was 6.9 percent.
If inflation rises to double digits, then you
have a negative real interest rate, meaning inflation is higher than
the cost of borrowing money. Simply translated, when you buy a car
or a house using borrowed money, you in effect gain because the
price (of what you buy) is rising while the interest rate has
remained the same.
In its latest World Economic Outlook, published
on April 9, the IMF slashed its forecasts for America’s economy
for both 2008 and 2009. The Fund now expects US GDP to shrink in
every quarter of this year. By the fourth quarter the economy will
be 0.7 percent smaller than a year before. (Only three months ago
the fund expected a rise of 0.9 percent.) In 2009, US GDP will grow,
but at well below its trend rate.
Recent US recessions, as defined by the NBER,
have been both short and shallow. The recessions of 1990-91 and 2001
each lasted eight months, below the post-war average of ten. If the
Fed is right, the 2008 recession may be shorter and shallower still.
“That would be remarkable, given the extent of the housing bust
and credit turmoil,” The Economist points out.
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