Calling a depression a depression

What if the world had a depression and no one noticed?

I don’t know about you, but the pictures I saw at school when learning about the Great Depression revealed graphic and widespread misery. The scars of the Great Depression were etched on the faces of that generation of drawn and pinched faces, furrowed brows. Pictures of gaunt and hungry children wearing rags and holding placards “why can’t you give my dad a job”. Jobless queues that stretched around the block. Starvation, fear and suffering.

We’ll never be as poor as we were back then. Hopefully. The starting base for standard of living, in the developed world at least, is much higher today than back then. Welfare states are better evolved meaning starvation is less of a risk now.

But looks can be deceiving.

The setback to growth in many European countries is as great now as it was back then. In Europe, the 'Great Recession' is morphing into simply another Great Depression.

It’s worst in the peripheral European nations, of course. Even in less basket case economies like Spain, the jobless rate posted an eye-wateringly high reading at 27 per cent.

But it would be wrong to think the core countries are faring much better.

Overnight, the United Kingdom’s latest report card on economic growth revealed meagre growth of just 0.3 per cent – just enough to reverse a 0.3 per cent decline in the previous three months.

But the beauty of economic statistics is in the beholder.

Markets had feared another quarter of shrinkage that would have met the technical definition of recession, making Britain’s Great Recession a triple dip recession.

The UK Chancellor may have escaped that specific ignominy, but the UK economy remains 2.6 per cent smaller than before the crisis.  

The Guardian website’s excellent Data Blog has a graph revealing that this is the UK’s slowest recovery since 1900, slower now than the Great Depression. In all the major slowdowns of the 20th century – the Great Depression, the 1970s oil crises and the early 1990s recession – GDP growth had recovered by now, about 51 months into the crisis. 

This is the deepest and most prolonged fall in GDP in the UK in a hundred years or more.

In London, delivering a speech titled 'Bellweather Europe', the International Monetary Fund’s first deputy managing director, David Lipton, overnight offered a gloomy prognosis.

The IMF has been honing its metaphor of a 'three speed' global economy, with the developing world in the fast lane, the US in the middle lane and Europe falling far behind.

The IMF sees average growth in the euro area of just 1 per cent last year, nowhere near enough to return economies to their pre-crisis levels of output, nor to soak up the jobless. Investment is still declining and unemployment rising. And reform fatigue is setting in, Mr Lipton said.

“It is against this backdrop that the risk of a stagnation scenario is most worrying. If recovery does not materialize, the euro area could find itself facing the specter of policy quicksand – in which relentless balance sheet deterioration drags the economy in deeper and blunts the impact of even bold policy adjustment.”

This economic 'quicksand' would be similar to the scenario played out in Japan over the past 20 years.

A grim prognosis indeed.

The chorus of voices warning of another depression is growing.

The Archbishop of Canterbury, Justin Welby, told a Bible Society meeting this week that: “What we are in the moment is not a recession but is essentially some kind of depression. It’s going to take something very major to get us out of it in the same way as it took something major to get us into it."

The Bank of England governor, Sir Mervyn King, has opined: “This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”

And of course, the world’s most vocal Keynesian, Paul Krugman, still wants to 'End this depression now!'

As the financial crisis stretches towards its sixth year, I sense something of a crisis fatigue. The risk is that policy leaders accept very low rates of growth as the new normal – something about which not very much can be done.

The world’s largest trading zone is stuck in a low growth trap and there is very little momentum to escape it.

But the crisis is far from over. And the longer it goes, the wiser it would be to finally accept this is not a Great Recession, but a depression proper.

A declaration to that effect by European leaders could be the catalyst needed to galvanise further action to fix the broken European model with a true fiscal union and greater banking integration.

Because whatever they’re doing now, it’s not working.