Recession

A recession, technically speaking, happens when an economy experiences two consecutive quarters of negative growth. That last phrase, “negative growth”, seems like an oxymoron. But economists thrive in the use of that term.

In no other economy is the word “recession” more dreaded than in the US — and not just by the natives there but by the entire world. This is because the US economy is the principal consumer of everything the rest of the world has to sell.

The rest of the world is happiest when Americans beat up their credit cards and run up debts. All of us are happy when Americans spend like money was going out of style. That means we can export more, create more jobs at home making things Americans will eventually buy.

Now everybody fears the US economy might go into a recession. That has caused volatility in the stock markets and currency exchanges. Whenever the New York Stock Exchange dips, stock markets all over the world plunge.

There is fear everywhere. That fear has driven markets to behave erratically, plunging one day and rallying the next.

The fact is: the US is not in a recession. At least not yet. A recession requires two consecutive quarters of negative growth. We have not seen the first quarter yet.

US authorities have taken dramatic measures to arrest the drift towards a recession. The Bush administration unveiled a package intending to spur domestic economic activity. The Fed, for its part, decreed a deep cut in interest rates this week.

The global markets have yet to decide whether the measures announced the past few days are adequate to arrest the recessionary drift. The Bush administration package was declared insufficient and Wall Street plunged. The Fed rate cut was deep but probably not deep enough. The markets nevertheless showed a slight recovery.

The past two days, there were signs that market sentiment has turned positive. Wall Street began climbing up and the oversold markets everywhere else yielded gains as bargain hunters began buying stocks again.

Our own Phisix took a deep plunge the past two weeks, tracked by the peso which slightly weakened against the dollar. The past two days, our market reflected the whiff of optimism that swept global equities markets worldwide.

It is now expected that the Fed will cut interest rates further. As signals of that possibility become more perceptible, the markets should start recovering more lost ground next week.

Those rate cuts will take several months to have an effect on the lackadaisical US domestic economy. The markets will need more information about how the American economy is responding to the monetary remedies.

While the rate cuts will direct more funds back to the real economy, it could also happen that funds will flow to the Euro area. The European authorities are more inclined to keep their higher rates in order to hold back inflation. The thinking, across the Atlantic, is slightly different from the thinking of US monetary authorities.

In the US, continued growth (and averting recession) takes precedence over keeping a lid on inflation rates. The recent deep rate cut by the Fed (and the second round of cuts expected in a few weeks) will release more funds into the real economy, to be sure. But that could also fan inflation.

Billions of dollars have been written off by the large American-based investment houses. Those lost dollars could not help fuel a better growth rate for the US economy. Last Thursday, news broke out that a trader for Societe General (the second biggest French investment bank) had lost billions. That is reminiscent of what happened to the Barings Bank a few years ago. Barings had to shut down and the investment bank was absorbed by Dutch financial giant ING.

The problem created by that rouge trader at the Societe General adds to the wariness of the markets. If Societe General takes a big loss, the disease afflicting the US economy could infect the European market and spark a wider sell-down.

We have to watch developments very closely. Each day seems to show a different dynamic from the days preceding.

Most analysts are hoping the strong growth of the two most populous economies — China and India — will help cushion the effects of a possible US recession. The two most populous countries have a large consumer base. They could become the market for those who see very little to cheer about in the US.

But we are not too sure about that either. While they may have demonstrated a strong potential for sustained economic expansion, neither of these two giants have commensurate appetites for what the rest of the world needs to export somewhere.

At Davos, the other day, President Arroyo assured international investors that the Philippines was ready to weather a US recession. Our currency was strong. Our balance of payments in the black. Our trading position remains competitive.

But that, of course, depends on how deep the expected US recession will be as well as how broadly it effects the rest of the global economy. The Euro area is not expected to fuel growth for the global economy. The Japanese economy remains in a long cycle of stagnation.

World prices for crude oil remains the wild card. If oil holds its current price level, recession will be inevitable. If it spikes up some more, our own growth could be compromised.

This, it becomes more apparent, is the year we must dig trenches to protect the gains our economy achieved.