Notwithstanding refinancing and other palliatives for home owners announced by President Obama in his State of The Union Address, the recovery of the US housing market depends ultimately on robust demand which in turn depend on strong job and income growth.
The measures "To Recover, Rebalance, and Rebuild" as proposed in the Economic Report of the President Click here (Chapter 1) will take time. Even if the economy recovers, it is by no means certain that corporate production and profits would proportionately translate into more middle-class jobs and better wages.
In the same Chapter of the Report, it is pointed out that "Income growth was stagnant for middle-income earners in the 2001–07 period and, as is common, declined in the recessions at the end and beginning of the decade." This reflects a long-term trend. The chapter admits that "the size of the middle class has shrunk. This disturbing trend has taken place over several decades."
This underscores the phenomenon of globalization of the value chain. More and more low-skilled blue-collar production jobs in high-cost countries have become non-competitive internationally. It is doubtful whether, at least for some time, there will be enough high-skilled jobs (and high-skilled personnel) generated in America to fully offset this trend.
The Report (Chapter 2) reviews the influential works by Charles Kindleberger (1978) and Carmen Reinhart and Kenneth Rogoff (2009), "who argue that recessions associated with financial crises are typically deeper than normal downturns and that the recoveries that follow tend to take longer."
In "The Aftermath of Financial Crises*, a paper prepared for the American Economic Association meetings in San Francisco, January 3, 2009, Reinhart and Rogoff observed -
"Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics.
First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.
Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.
Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes.
Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system......... In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn."
With specific regard to the housing sector, the duration of downturn (from four to seven years) and magnitude of decline (from 12.6% to 50.4%) for advanced countries are featured in Table 10.8 (p. 160) of Reinhart and Rogoff's empirical work "This Time Is Different - Eight Centuries of Financial Folly", Princeton University Press, 2009.
This post-Crisis long-hard slog is echoed in McKinsey Quarterly's January 2010 Report "Deleveraging: Now the hard part". Click here
In an Exhibit "A slow start", in the first two years of a five-year recession, economic downturn begins as the economy continues to increase leverage, followed by further downturn during the first years of deleveraging. In the subsequent four to five years, the economy may ‘bounce back’ while deleveraging continues.
So what is the outlook of the US, Europe and developing economies in 2012?
I can do no better than refer to the overview with a coloured globle chart in "The year of self-induced stagnation" in The Eonomist by Zanny Minton Beddoes on 17 November 2011. Click here
The developing economies will of course be affected by the lack-lustre Western markets, but their growth rates in 2012 should remain respectable as much more trade is being done amongst themselves, especially with a re-balancing China, which is still expected to grow by 8.2%.
For a more in-depth look at the prospects for a soft-landing of China's economy in 2012, you may find it useful to Click here for a short overview