The Recession Will Be Over Sooner Than You Think
"The heightened uncertainty after the credit crunch led firms to postpone investment and hiring decisions. Mistakes can be costly, so if conditions are unpredictable the best course of action is often to wait. Of course, if every firm in the economy waits, economic activity slows down.
But now that uncertainty is falling, growth should start to rebound. Firms will start to invest and hire again to make up for lost time. Figure 2 above shows our predicted impact of the spike in uncertainty following the credit crunch, based on our detailed analysis of 16 previous financial, economic and politically driven uncertainty shocks. After falling by 3% between October 2008 and June 2009, we forecast real GDP will rapidly rebound from July 2009 onwards.
Many economists make the case for a stronger policy response. That might be right, but policy makers need to act fast. Any additional economic stimulus – be it a spending package, quantitative easing or a couple of rounds of liquidity injections – has to be enacted quickly. Dithering over different courses of policy will actually make things worse by adding uncertainty. Delaying the stimulus package until the summer may mean that it is too late. The economic medicine will be administered just as the patient is trying to leave the hospital!"
HT: Paul Sebastian