THE debate about whether the recession is ending appears over. There is sufficient evidence that industrial production has turned the corner and that the US and UK housing markets have started to rise, suggesting that growth is likely in the second half of 2009.
The synchronisation of the global collapse in activity works in favour of a stronger-than- expected bounce, as confidence and orders recover everywhere at more or less the same time.
The debate has moved on to what comes after the bounce. Once output has risen to run in step with current depleted levels of demand, what will drive a further recovery? Will the recovery be shaped like a U, a V, a W or a U-bend?
The answer depends partly on the stance of monetary and fiscal policy. Recent pronouncements from central bankers have studiously avoided talking up signs of recovery. Although they have drawn encouragement from the improvement, they appear keen to reassure that policy will not be prematurely tightened.
This is important, both because of the aftermath of last year's shocks and because of the less emotional obstacles to a normal recovery.
Past rates of economic growth in the UK and elsewhere were only achieved via the use of performance enhancing products, in the form of home equity loans, leverage and securitisation (the latter enabling loans to be financed at higher levels than domestic deposits alone could sustain).When the credit markets seized up and house prices fell, these turbo-drivers disappeared, causing a shortfall in demand.
Economic uncertainty has made borrowers more inclined to repay debt than add to it, leading to a rise in the rate of saving from income. This may be a good thing but it has not been painless.
Lower interest rates can help smooth this adjustment, by enabling part of the rebuilding of savings to come from interest savings, although for depositors it forces them to accept lower income or seek higher risk ways of rebuilding the lost income.
The recapitalisation of the financial system brings forward the time when the banks will emerge from the hermitage to which they retreated, after the dancing stopped in mid-2007, but they still appear over-prudent in their current lending policies.
Part of the hole in the economy's funding base has been filled by special measures such as the Bank of England’s quantitative easing programme, which has provided liquidity for the institutions to refinance companies that had been over-reliant on borrowings.
Although this panoply of stimulants, drips and crutches has allowed the patient to get out of bed, an early departure from the hospital is not yet certain.
The economy has moved from the emergency ward to treatment for chronic indebtedness. With the right treatment, convalescence can proceed without a relapse but it will take time. This does not mean that the recovery will stall, but it could be lightweight by past standards.
Recently rebuilt levels of confidence will be tested by the usual autumnal volatility, but, unlike a year ago, market setbacks are more likely to be an opportunity for selective buying than a reason to abandon ship.
