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by Valentino Piana (2015)



1. Summary features of this phase in the business cycle
2. Typical pathways in key economic areas
3. Key events
4. Winners and losers
5. Influence on election outcomes
  6. Risks of countervailing developments  
  7. Transition to the next phase  

8. Empirical examples


Summary features of this phase in the business cycle

Gradual and uneven improvement in economic conditions. Early signs of growth after the trough in some leading indicators. Conflicting evidence in other areas. Optimists frame positive news, pessimist don't buy them.

Typical pathways in key economic areas

Domestic business dynamics

A few firms and sectors sell their inventories and make extremely high profits. They are the first to seize narrow increases in demand, be it from innovations in household behaviours or in supply chains, from government expenditure or the foreign markets.

They have been successful in marketing their product, find the right combination of quality and prices, offer solutions to customers' liquidity problems.

Most firms do not see sign of improvements.

In general terms, recovery lasts until losses in GDP have been recovered and employment has stopped shrinking.

However a few exceptions should be highlighted:

1. when recession did not reduce GDP in absolute terms, recovery is better defined as a period of acceleration of growth in which, however, the percentage remain small (e.g. below 2%) and employment is not growing;

2. when a very large GDP fall is followed by a marked qualitative transformation of the economy, in which new sectors, new products and new versions of existing products dominate the increase, to the effect that GDP will never again be the same as before. In this case, employment should better used to distinguish recovery from expansion, with the latter possibly beginning before GDP reaches the same level that it had before (in radically different economic structure).

It should be noted also that recovery in GDP levels "before the crisis" does not mean that GDP is at the level in which it would have been in absence of the crisis (by extrapolating past growth). Moreover, it often happens that depression reduce the average rate of growth with respect to the previous periods, and such high levels may never return, inflicting a lasting damage to the economy and society.

Foreign trade

Foreign trade may have contributed to the turn-around either because the prosperity of other countries resulted in export to them or because of "inversion" - a fall in imports, which are normally a brake to GDP but during this special condition becomes a major contributor to the - weak - GDP uptick. Recovery as such might be continuing this type of dynamics or, instead, see a moderate worsening of trade balance, if GDP is rebounding strongly.

Labour market

Firms don't need additional labour to sell existing inventories and usually people have slack labour time to use even for increasing production. So overall employment remain flat, with some new hiring in particularly successful firms and sectors (possibly counterbalanced by negative trend in others).

Public finance

The efforts in active fiscal expansion would be reflected in very large increases in public deficits, with tax revenue being a delayed effect of the effectiveness of such efforts.

Since VAT is not due by exporters, in export-led recovery, the state will see positive effects in its balance sheets only when it will translate into company profits (and in expansion to new employees and longer hours of work).

Financial markets

The stock exchange may be quick to move on positive news and in the expectations that external and policies will help restoring confidence and increase profits in quoted firms (usually the largest of the country).

However, false starts may provide a lot of suprises to investors.

Price level and real interest rates

Usually interest rates are kept low by the central bank to support the economy during recovery. The firms that are increasing their profitability take the opportunity of such rates to repay debts, selectively increase discretionary investment (e.g. advertising, R&D, etc.).

The productivity spike (due to flat labour cost and rising sales) allow for inflation reduction.

Key events

Positive surprises and business example of success are highlighted by the television and the press (especially if pro-government). But reports on structural difficulties of large part of the population remain well present (especially in anti-government press).

Winners and losers

The limited sectors, firms and social groups involved by the recovery (e.g. exporters in an export-led recovery) see the light in the tunnel. They are more optimist for their own results and the economy at large.

Influence on election outcomes

Recovery is a period of contrasting news, and by selectively listen and leverage certain piece people can build very different judgement and attribution to policies and political figures.

Government is quick to boast success, and if it introduced large-scale effective policies to contrast recession and depression it may be right. But the large majority does not see improvements for its own account. So the opposition is favoured if elections are held during recovery and economic consideration are at centre of voters' information and decisionmaking.

There is an "attribution bias" at work as well: people easily blame the government for troubles but are reversing course and attribute to themselves positive news such as finding a new job (while they have blamed the economy when losing one).

Risk of countervailing developments

Recovery is not recognised by pessimists and the opposition for a long while. Policies that were taking into effect may be reversed (as ineffective) if the government is shaken or there is a shift in problem setting. If earlier the problem was a shrinking GDP and then it is a widening public deficit, it's easy to pass from a fiscal expansion to a restriction. In this case, and in other parallel one for other types of turn-around, the main risk of recovery is to fall back into recession (double dip recession).

Transition to the next phase

In a metaphor, recovery is the cross result of "cold" and "warm" waters mixing. It is slightly warm if the proportion of the contractionary and expansionary forces give some prevalence to the latter. If they are intensifying over time and the former regress, recovery becomes more sound and - at a speed which depends on a number of factors - it leaves way to expansion.

If recovery is very strong in one sector of the economy, without transmission mechanism to the rest (e.g. because of the weak redistributional role of the state and highly segmented labour force, including because of regional disparities), it can give rise to a dual economy (one booming and the other contracting or remaining flat).

Empirical examples

* Turkey 2002: after a GDP fall by 9.4% in 2001, the country is rebounding by 4.3%, largely because of inventory dynamics. Exports are growing by 8.3%, after a currency devaluation of about 50% in 2001. A number of steps have been taken to consolidate and restructure the banking sector, and inflation is tamed to 32% from 82%.

In this economic frame, the three governing parties badly lose the elections, failing to enter the parliament again. The absolute majority of seat is grasped by Erdogan's party, previously in the opposition, beginning a very long governing experience.


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