This has brought into play another abiding economic truism: that periods of excessive demand don’t just peter out and die of old age, but are murdered by the actions of the central bank.
A recession, then, would appear to be imminent, brought on by a central bank desperately trying to correct its past mistakes. The only question is how deep and prolonged.
In Europe, we define a recession as two consecutive quarters of declining growth. On that definition, Germany is already in one, having seen a decline in real GDP in both the final quarter of last year and the first quarter of this.
Likewise, the US experienced a technical recession in the first half of last year, even though jobs were at the time being created at a record pace.
“When you’re creating almost 400,000 jobs a month, that is not a recession,” declared Janet Yellen, US Treasury Secretary at the time.
Indeed not. Instead, the US adopts a more judgemental definition. A recession is declared only after the event on examination of all the available data by a National Bureau of Economic Research panel of experts.
Crucially there has to be a steep rise in unemployment and equally significant fall in retail spending and industrial production.
None of these things are happening at the moment in the US and, despite market and official interest rates similar to those of the UK, nor has there been any notable fall in asset prices, at least insofar as the stock market is concerned.
To the contrary, the S&P 500 index of leading shares is up nearly a fifth so far this year, if still admittedly a little off last year’s peak.
In other words, there is at present little sign of the much heralded Biden recession. It may be coming; unlike the UK, monetary tightening has already prompted a quite significant decline in the quantity of money stateside. But thanks in part to the Inflation Reduction Act, there has also been a parallel and offsetting boom in manufacturing investment. This in turn is creating lots of new jobs.
