Bill Jamieson: Army of models both old and new

Published on Monday 25 May 2009 21:54

WHEN it comes to recovery, in what shape are we really in? Is it a "V"? Is it a "U"? A double-dip "W", or even an "L" – no upturn at all? These are grim times for economists and their models. In the dealer showrooms a glittering array of the Vs, the Us and the Ws can't seem to find the compelling sales pitch that would make them the 2009 Model of the Year.

The silver-tongued dealers can't make up their minds which ones to talk up, and which to discount.

The V model with its quick-start and noisy, full-throttle "vroom-vroom" engine depicts a sharp recovery from the recent downturn.

This is the "best-case scenario" model. It should be flying off the showroom floors today. Top dealers Alistair Darling and Gordon Brown are on top commission to shift it. Unfortunately, the punters aren't sure that it will rev up at all when they get it out on the road.

U-shaped recessions describe those that begin with a slightly shallower decline, but then remain at the bottom for an extended period before turning around and moving higher again.

The recession – or extended period of slow growth from 1971 to 1978 when both inflation and unemployment were high for years – is considered a good example of a U-shaped recession.

But hope is at hand for our dealers in despair. A spanking new model is now being wheeled in to the front of the showroom windows this summer. And it could be the 2009 Best Seller.

It's called The Bathtub. It shows the economy going into decline, then a long "bottom" before it takes off into an angled recovery. The ascent is not quite as steep as the U, but certainly preferable to the false dawn W and far, far better than the Lost Decade "L".

An upmarket designer variant of the Bathtub Model is the Ribbed Bottom Bathtub (likely stockists Smallbone and Fired Earth). The ribs help to prevent foot slippage and appeal to the elderly and infirm – so it should echo economic conditions here perfectly.

Dealer interest in the new model has exploded with the visit of top US economist Professor Robert Shiller to Britain to promote his latest book Animal Spirits. How Human Psychology Drives the Economy and Why it Matters for Global Capitalism.

Shiller is so eminent that he even has an index named after him: the Case-Shiller US house price index. It's now avidly watched by politicians and economists as a pointer to recovery in the American economy.

His basic thesis is that we should treat the recent dramatic bounce in world stock markets with caution.

The apparent upturn, he warns, could go into reverse, marking a repeat of economic patterns in the 1930s and the 1980s.

Since March the stock market has rebounded by 27 per cent, raising hopes that the recession may not be as severe and protracted as many had feared.

This fanned hopes that Chancellor Darling may not have been far out in his Budget prediction that the worst of the recession would be over by Christmas and that Britain would be heading into recovery.

But, recently, doubts have set in. This is due to an array of pointers showing that the economy is still slowing and early signs of recovery are not as robust as some began to hope.

It has also not been helped by the advice given to Prime Minister Brown to do a Barack Obama: talk up the economy and look cheerful. Unfortunately, Brown smiling looks about as cheerful as a morgue door.

The shorthand symbol for this recession-recovery-recession pattern is a W. Warming to the theme yesterday, Yale University economics professor Shiller and the BBC's Evan Davies fell into a surreal discussion over a Bathtub shaped recession.

This seems to be a muted version of the much-feared W double-dip. Shiller points to the prospect of a prolonged multi-year period of house price falls, which could land Britain in a long, extended period of convalescence such as Japan in the "Lost Decade" of the 1990s.

Shiller warns that there is a real possibility of another recession: "We may well see more bad news. It is a real failure of the imagination to think otherwise."

Recovery in the UK is threatened by further rises in unemployment, more mortgage defaults and another wave of company failures that "could surprise us yet".

Shiller also said that the banks were still harbouring large portfolios of troubled assets. "We all want to lick this problem – there's been a burst of confidence over the last few months but, really, it's not based on any news. A lot of people think this recession is coming to an end. But I'm not so sure. A resurgence in confidence may not translate into new jobs. We are still in uncertain times."

An example of the W shape economists fear most began under the Hoover administration in 1931, when signs of economic recovery sparked a huge stock market rally.

But the economy plunged again, leading to a recovery in the mid-1930s that was, in turn, snuffed out by a slowdown in 1937-38. The stock market never recovered its pre-Crash 1929 peak until the 1950s.

Shiller has a good forecasting record, having warned of the dot-com bust. And he was quick to grasp the severity of the subprime debacle. But not all economists are now as downbeat.

As for the more familiar alphabet economic models, there are nuanced variations.

For example, there is the "Dozy W" in which the second downturn of the Double Dip is worse than the first, and an "Energetic W" in which the a deep recession is followed by a shallower one.

Then there's the "Stalled V" in which the recovery leg suddenly stops and levels out to leave a square root sign – as in square root of nothing very much. And finally there's the dreaded "O", normally confined to descriptions of pre-industrial economies but now back in fashion as a 'Q' .

This describes an economy trapped in a static "O" followed by a sharp descent into the economic mire. "Qs" are really now confined to economists' museums, but the financial crisis and ferocity of the recent downturn has brought a ghoulish revival of interest: economic modelling for Goths. How do societies ever recover from Q? By wars and revolutions, chiefly.

Amid the Vs, the Ls and the Ws it looks as if its the Bathtub Model that has, as they say, "legs".

But would these be straight legs, angled legs or bandy legs? And what might bandy legs represent? Don't even think of asking.