Economic recovery

A "Project funded by The American Recovery and Reinvestment Act" project sign

An economic recovery is the phase of the business cycle following a recession.

During the recovery period, the economy goes through a process of economic adaptation and change to new circumstances, including the reasons that caused the recession in the first place, as well as the new policies and regulations enacted by governments and central banks in reaction to the recession.

When displaced workers find new employment and failing enterprises are bought up or broken up by others, the labor, capital goods, and other economic resources that were tied up in businesses that failed and went under after the recession are re-employed in new industries. Recovery is the process by which the economy heals itself from the harm it has sustained, paving the way for future growth.

"Terms such as 'recovery', 'reconstruction', and 'rebuilding' might suggest a return to the status quo before the conflict. Typically, however, developmental pathologies such as extreme inequality, poverty, corruption, exclusion, institutional decay, poor policy design and economic mismanagement will have contributed to armed conflicts in the first instance and will have been further exacerbated during conflict. Accordingly, post-conflict recovery is often not about restoring pre-war economic or institutional arrangements; rather, it is about creating a new political economy dispensation. It is not about simply building back, but about building back differently and better. As such, economic recovery . . . is essentially transformative, requiring a mix of far-reaching economic, institutional, legal and policy reforms that allow war-torn countries to re-establish the foundations for self-sustaining development."

Indicators

Leading indicators include the stock index, which often increases ahead of an economic recovery. This is generally because stock markets are guided by potential hopes. Employment, on the other hand, is usually a lagging measure. Since many employers will not recruit additional workers until they are sufficiently sure that there is a long-term demand for new hiring, unemployment frequently stays strong even though the economy starts to recover.

GDP is typically used to predict economic phases, with two-quarters of successive negative GDP growth signaling a contraction. Consumer morale and inflation are two other economic factors to remember.

Keynesian vs Classical Theory

Keynes dismissed the classical view that the economy must naturally return to equilibrium. Instead, he concluded that if an economic slowdown occurs, for whatever reason, the panic and gloom that it generates among firms and consumers seem to become self-fulfilling, leading to a prolonged period of low economic growth and unemployment. In reaction, Keynes proposed a countercyclical monetary strategy in which, during times of economic adversity, the government could engage in deficit spending to compensate for a fall in consumption and increase consumer spending in order to sustain aggregate demand.

According to Keynes, depression can trigger a vicious loop in which unemployment lowers demand to the point that no new jobs can be generated. By stimulating demand, government action builds a positive cycle.

The Keynesian approach in points

• Provide a strong monetary and fiscal stimulus – public spending is needed when private sector demand is small.
• Pay special attention to labor-intensive development programs that have the capacity for a large fiscal multiplier impact.
• Bailout the private sector to save massive employment cuts.

History

Great Depression

Given the importance of monetary deflation and the gold standard in triggering the Great Depression, it is not shocking that currency depreciation and monetary growth were the primary causes of global recovery. However, devaluation did not explicitly increase productivity. Rather, it helped countries to increase their money supply without having to worry about gold flows or exchange rates. Countries that took advantage of this freedom recovered faster. The United States' monetary growth, which began in early 1933, was especially dramatic. Between 1933 and 1937, the American money supply rose by almost 42 percent.

This monetary expansion was largely the result of a massive gold inflow to the United States, which was prompted in part by increasing political tensions in Europe prior to World War II. By cutting interest rates and making credit more readily accessible, monetary inflation increased spending. It also provided inflationary rather than deflationary expectations, allowing prospective creditors more hope that their incomes and earnings would be able to fund their debt payments if they were to borrow. Fiscal policies played a minor role in promoting recovery in the United States.

Franklin D. Roosevelt's New Deal, which began in early 1933, included a host of new federal measures aimed at spurring recovery. It remains to be seen if they have any positive impact on customer and company opinion. Any New Deal projects may have hampered rehabilitation. The United States' recovery was cut short by another distinct contraction that began in May 1937 and lasted until June 1938.

Financial Crisis 2007-2008

The United States responded to the Financial Crisis by cutting interest rates close to zero, buying back mortgage and government debt, and bailing out several distressed financial institutions. With interest rates too low, bond returns have become much less appealing to buyers as compared to stocks. The government's reaction sparked the stock market, with the S&P 500 returning 250 percent over a ten-year stretch. The housing market in most big cities in the United States recovered, and the unemployment rate plummeted as firms started to recruit and spend more.

Other central banks reacted in a similar manner to the United States. All governments boosted their spending to spur demand and sustain jobs in the economy; pledged deposits and bank bonds to bolster interest in financial companies; and bought equity stakes in some banks and other financial institutions to avoid bankruptcies, which might have escalated the financial market crisis.

Despite the fact that the world economy suffered the most severe recession since the Great Depression, policy responses avoided a global depression.

As a result of the recession, authorities tightened their supervision of banks and other financial institutions. Among the several recent global rules, banks must now analyze the value of the loans they provide more carefully and use more resilient financing sources.

The adoption of the Dodd-Frank Wall Street Regulation and Consumer Protection Act, a major piece of financial reform legislation enacted by the Obama administration in 2010, was one result of the crisis. Dodd-Frank altered every part of the United States financial regulatory system, affecting every regulatory agency and every financial service company.

See also

• Green recovery
• Great Depression
• Post-War
• 1990 Oil Price Shock
• Financial Crisis 2007-2008

Further reading

Staff, Investopedia (2010-12-22). "Economic Recovery". Investopedia. Retrieved 2018-01-01.