Business·Analysis

Looking for an economic recovery that speaks English: Don Pittis

Things were supposed to look so much more gloomy as the Federal Reserve endd the stimulative effect of quantitative easing today, but instead there is new evidence that led by English-speaking countries, we are seeing a revival of the real economy, Don Pittis writes.

Sharing this story of recovery and growing 'animal spirits' may just make it true

Evidence is suggesting that English-speaking economies are leading a revival of the real economy. (Jacques Boissinot/Canadian Press)

There's magic in the air. Can you feel it?

Things were supposed to look so much more gloomy today with Federal Reserve chair Janet Yellen ending the stimulative effect of quantitative easing.

Instead, there is new evidence that led by the English-speaking countries, or what the Europeans sometimes call the Anglo-Saxon economies, we are seeing a revival of the real economy.

Federal Reserve chair Janet Yellen is expected to end the stimulative effect of quantitative easing today. (Michael Dwyer/Associated Press)

All the old grumps are still out there of course, especially the Europeans who are struggling with a currency that is supposed to be one-size-fits-all and isn't.

We haven't heard much about how the English-speaking economies can sync up lately, but I remember going to road shows put on by various investment firms over the years where clever analysts would speak to slides showing why they were smart enough to predict the economic future and thus were the right ones to look after your pile of money.

One of the more common slides was, if you can think back to your high school trigonometry, a set of overlapping sine waves. One represented the English-speaking countries and the other the big European economies, or everyone else.

The point was not that one of the two was better, but that they were travelling on different paths.

Always some doubters

As with every piece of economic analysis, there are high-profile doubters on the other side. But a scan of academic papers shows the phenomenon is recognized, if not trumpeted. 

The Anglo-Saxon economies "have likely fostered similar patterns in the transmission of shocks through what appears to be similar, market-based, financial systems," said this one from 2004

Of course, the world is more complicated now, more globalized, with China and Russia and the developing world all playing at the same table.

The links between Canada and the U.S., each the other's largest trading partner, are undisputed.

However, the City of London, as the financial hub of Europe, would seem to be more closely connected to that continent than this one. And Australia and New Zealand? They're in the Asian sphere now, aren't they?

But we are seeing signs of the phenomenon emerging once again.

Last week, Britain was touted by the Financial Times as "one of the fastest-growing economies in the industrial world."

Some bad news, too

This week, a survey by the Association for Financial Professionals showed that U.S. companies are starting to invest their cash piles for the first time since the beginning of the recession.

Here at home, the chief economist at Export Development Canada, Peter Hall, says there are signs that a U.S. recovery is "already translating into solid Canadian export growth."

Falling oil prices have done something that quantitative easing couldn't: put money in the hands of consumers to spend. (Sue Ogrocki/Associated Press)
The news is not all good, of course. Canadian consumer confidence is down again.

Capital Economics has also issued a report saying the loss of oil income will cut Canadian growth by 0.2 per cent.

But others have pointed out that falling oil prices are doing something that Yellen's quantitative easing never managed: taking money out of the hands of the huge corporations and giving it to consumers to spend.

If oil falls from $100 US to $70 US as Goldman Sachs predicted this week, that will represent a 30 per cent cut in energy bills that consumers and non-oil companies can spend on something else.

Still suspicious

I still enjoy reading the kind of analysis that patiently explains, say, that because bond prices are rising here, the markets are going to decline there. But I remain suspicious.

If economic analysis was such an exact science, would big hedge funds, with the money to buy the very best research, have lost 10 per cent in October and 20 per cent over the year? 

I think part of the answer is that for all the money we pay our economists to do graphs and calculations, the economic world is simply too complex to grasp.

In the meantime, it might be better to look for a simpler reason that the English-language economies are surging together.

And this is revealed by the "R-word index." As reported by The Economist a few years ago, a high frequency of the word "recession" in the media presaged an actual recession.

The term that I have been watching lately is "animal spirits."

Used by our own Bank of Canada governor Stephen Poloz in last week's Monetary Policy Report the term was invented by the economist John Maynard Keynes to describe the mysterious energy that inspires investment decisions and eventually consumer confidence.

Passing from person to person

Rather than something predictable or calculated, it is on the voodoo side of economics where, as Keynes said, "a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations."

It is this kind of economic force that can be easily passed on from person to person through language, especially in the age when a London night owl can be reading this very article at the same time as a Hong Kong early riser.

If a new wave of optimism really is spreading in this way, the important thing may not be the facts and figures but the shared story line that we can agree is in the process of pulling us out of gloom and into a renewed surge of animal spirits.

And here is the story I feel is happening.

We have had seven years of gloom and that is enough. Advances in technology have been accumulating but businesses have not had the courage to develop them into new lucrative products.

Instead, money has been bidding up stores of value like property, commodities and shares in old, existing companies.  

Now, with the end of quantitative easing, companies are realizing that waiting for monetary policy to bail them out is no use.

Sticking to the story

As companies change their thinking and begin to invest, stocks will rise not on immediate return but on products in the pipeline.

As companies change their thinking and begin to invest, stocks will rise on products in the pipeline (CBC)
Companies will rush to hire the best talent, then any talent, and put them to good use.

Unemployment will fall, and with the new money circulating in the economy, consumer confidence will rise and people will buy the new wave of products and services being invented.

That's my story. I'm sticking to it. At least until we see this week's GDP figures, or next week's jobs numbers.

But so long as those numbers are at least OK, this story is as good as any other.

And if Keynes was right, the story is important. Like one of those old chain letters, mail this to 10 of your English-speaking friends around the world.

And sometime soon, maybe, you will be rewarded with an economic recovery. 

ABOUT THE AUTHOR

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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