Signs of Hope for Future Economic Growth

By on November 7, 2010

Ian Shepherdson, chief United States economist at High Frequency Economics, is seeing optimistic trends in credit creation signaling better times ahead. About 5 years ago, Shepherdson was one of the few economists who warned of an impending housing bust leading to recession. According to Gretchen Morgenson, contributor to The N. Y. Times, Shepherdson has some precedent to back up his view:

One problem for economists and investors, he said, is that our current economic cycle does not have the typical recession-recovery characteristics or timeline. Those who thought it would be similar to recent recessions were trying to fit a square peg into a round hole; there was nothing normal or routine about the events we have just lived through.

But Mr. Shepherdson says he does find parallels in our experience and that of Sweden in the early 1990s. The expansion of bank credit before the peak was similar in both countries. Furthermore, Sweden’s boom, like ours, resulted in rocketing real estate prices and overleveraged consumers.

When the bubble burst, both countries experienced similarly awful contractions. Gross domestic product declined 5.1 percent in Sweden at the trough, compared with 4.1 percent in the United States.

Mr. Shepherdson hopes that the Swedish experience on the upside also repeats itself in the United States. After Sweden’s output bottomed out in early 1993, the country began an upswing that soon became supercharged. The initial growth was at an annualized rate of 2.5 percent, but by the second year of the rebound, G.D.P. growth was 5.3 percent, annualized.

We may not end up with a recovery that hot, Mr. Shepherdson said. But if the credit expansion he is expecting does transpire, he said, we could achieve annualized growth of between 3 percent and 4 percent in the second half of 2011. And the year after that looks even more promising, he said, because “credit conditions will be back to something like normal.”

Source: The New York Times
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