From past experience, however, we know that forecasters tend to underestimate economic downturns while overestimating the recovery. Given the vast list of negative shocks and developments that are or will be hitting the economy, this time may NOT be different:
- In the US, the labour market is not in brilliant shape (unemployment numbers are low but the participation rate has fallen, there is no or little sign of accelerating wage dynamics either). At the same time, its economy is in its sixth year of economic expansion, a timing that is usually linked to the turning of the business cycle. The Fed’s decision to start raising interest rates in December 2015 would point in the same direction of a weakening business cycle (or rather one that is de facto being weakened because of monetary policy slowing it down).
- In the UK, growth over the recent years has been driven by household expenditure, which in turn was based on the reappearance of a certain real estate bubble. At this moment, however, household demand for new mortgages is decelerating. If the renewed real estate bubble would come to a standstill or go into reverse, UK growth performance would suffer.
- In Japan, while ‘Abenomics’ is injecting short bursts of demand and growth into the economy, it is failing to kick start the process by which growth becomes self-sustained as real wages in Japan keep lagging behind productivity (see Graph 2). Even if the government seems to have rediscovered the value of coordinated collective bargaining in steering the economy away from deflation and in redistributing high but idle corporate cash reserves back to workers, too many jobs in Japan remain precarious, part time and hence underpaid.