Economic recovery

A "Project funded byThe American Recovery and Reinvestment Act"project sign

Aneconomic recoveryis the phase of thebusiness cyclefollowing arecession.The overall business outlook for an industry looks optimistic during the economic recovery phase.

During the recovery period, the economy goes through a process of economic adaptation and change to new circumstances, including the reasons that caused therecessionin the first place, as well as the newpoliciesand regulations enacted bygovernmentsandcentral banksin reaction to therecession.

When displaced workers find newemploymentand failing enterprises are bought up or broken up by others, the labor,capital goods,and othereconomic resourcesthat were tied up in businesses that failed and went under after therecessionare 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 extremeinequality,poverty,corruption,exclusion,institutional decay, poor policy design and economic mismanagement will have contributed toarmed conflictsin 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 thestock index,which often increases ahead of an economic recovery. This is generally becausestock marketsare guided by potential hopes.

Other important indicators areunemploymentrate andemployment-population ratio(EPR). In the recovery phase we can talk about total recovery after the unemployment rate reaches its prerecession norm, because at this state the economy reached its prereccesion optimal level of unemployment. The norm for unemployment is in most of countries considered to be between 4-6 %.

On the other hand, both unemployment rate and EPR are 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,unemploymentfrequently stays strong even though the economy starts to recover and it is equalized by the end of recovery phase.

GDPis typically used to predict economic phases, with two-quarters of successive negativeGDPgrowth signaling acontraction.There is also a perception, that the Economic recovery phase ends, when the country's GDP reaches its prerecession level, so the economy will reach the level of GDP equal to the latest peak, and at this point starts an economic expansion. There is also a difference in the definition of previous peak. There we can measure eitherReal GDP,or potential real GDP, which is the highest level that can be sustained over a prolonged period without causing excessive inflation. (As the Congressional Budget Office explains - CBO. )

Consumer morale andinflationare two other economic factors to remember.

Keynesian vs Classical Theory

Keynesdismissed theclassical viewthat the economy must naturally return toequilibrium.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 andunemployment.In reaction,Keynesproposed a countercyclicalmonetary strategyin which, during times of economic adversity, the government could engage in deficit spending to compensate for a fall inconsumptionand increaseconsumer spendingin order to sustainaggregate demand.

According toKeynes,depressioncan trigger a vicious loop in whichunemploymentlowersdemandto the point that no new jobs can be generated. By stimulatingdemand,governmentaction builds a positive cycle.

The Keynesian approach in points

• Provide a strong monetary and fiscal stimulus –public spendingis needed whenprivate sectordemandis small.
• Pay special attention to labor-intensive development programs that have the capacity for a largefiscal multiplierimpact.
• Bailouttheprivate sectorto save massive employment cuts.

History

Great Depression

Given the importance of monetary deflation and thegold standardin triggering theGreat Depression,it is not shocking thatcurrency depreciationand monetary growth were the primary causes of global recovery. However,devaluationdid not explicitly increaseproductivity.Rather, it helped countries to increase theirmoney supplywithout having to worry about gold flows orexchange rates.Countries that took advantage of this freedom recovered faster. TheUnited States' monetary growth, which began in early 1933, was especially dramatic. Between 1933 and 1937, theAmericanmoney supply rose by almost 42 percent.

This monetary expansion was largely the result of a massive gold inflow to theUnited States,which was prompted in part by increasing political tensions inEuropeprior toWorld War II.By cuttinginterest ratesand makingcreditmore readily accessible,monetary inflationincreased spending. It also providedinflationaryrather thandeflationaryexpectations, allowing prospectivecreditorsmore hope that their incomes and earnings would be able to fund theirdebtpayments if they were to borrow.Fiscal policiesplayed a minor role in promoting recovery in theUnited States.

Franklin D. Roosevelt'sNew Deal,which began in early 1933, included a host of newfederalmeasures aimed at spurring recovery. It remains to be seen if they have any positive impact oncustomerand company opinion. AnyNew Dealprojects may have hampered rehabilitation.The United States' recovery was cut short by another distinctcontractionthat began in May 1937 and lasted until June 1938.

Financial Crisis 2007-2008

The United Statesresponded to theFinancial Crisisby cuttinginterest ratesclose to zero, buying backmortgageandgovernment debt,andbailing outseveral distressedfinancial institutions.With interest rates too low,bondreturns have become much less appealing to buyers as compared tostocks.The government's reaction sparked thestock market,with theS&P 500returning 250 percent over a ten-year stretch.The housing marketin most big cities in the United States recovered, and theunemployment rateplummeted as firms started to recruit and spend more.

Othercentral banksreacted in a similar manner to the United States. All governments boosted their spending to spurdemandand sustain jobs in the economy; pledgeddepositsandbank bondsto bolster interest in financial companies; and boughtequity stakesin somebanksand otherfinancial institutionsto avoidbankruptcies,which might have escalated the financial market crisis.

Despite the fact that the world economy suffered the most severerecessionsince theGreat Depression,policy responses avoided a globaldepression.

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 theloansthey provide more carefully and use more resilient financing sources.

The adoption of theDodd-Frank Wall Street Regulation and Consumer Protection Act,a major piece offinancial reformlegislationenacted by theObama administrationin 2010, was one result of the crisis. Dodd-Frank altered every part of theUnited Statesfinancial regulatory system,affecting everyregulatory agencyand every financial service company.

Covid-19 Crisis 2020-2022

The methods by which countries' governments promoted economic recovery can be generally divided into two groups;centralizedanddecentralized governments.

Centralised

ThoughThe United Statesfaced several economic challenges amid the ongoing global pandemic, 2021 was a successful year in the USA economy. The country likelyreached the fastesteconomic growthsince 1984, and has seen record jobs gains and a considerable drop in unemployment. All of this is due to the policies implemented during the pandemic.

At the beginning of the COVID-19 pandemic, the USA government decided to implement multiple aid programs, which are collectively known as 'Biden Boom'.Of which 2 major programs were theAmerican Rescue Plan Act(ARPA) and the COVID-19 vaccine program. Much of this aid was disbursed to the families who were most negatively financially impacted by the pandemic. These policies addressed weaknesses in thesocial safety netthat became more apparent during the pandemic. The U.S. economy gained an average of 565 000 jobs per month and 6.2 Million during 2021. As a result of high job gains theunemployment ratefell by 2.5% and reached 3.9% at the end of 2021. Because of low unemployment and a rise in income, The United States managed to surpass their pre-pandemiclevel of economic output.The U.S. was also the first country fromG7to recover allGDPlost during the pandemic. The economic growth was estimated to be 5.5 percent for year 2021.

Other countries implemented similar policies, but they were not as effective. Report produced by theUN Department of Economic and Social Affairs(DESA) in 2022 states, that there is still a large number of problems, namely new waves of COVID-19 infections, persistentlabour market,lingeringsupply-chainchallenges, and rising inflationary pressures, which slows globaleconomic growth.The slowdown is expected to continue in upcoming years. After a boom driven by higher spendings made by governmentin 2021 and the economic growth of 5.5%, global output is assumedto grow by only 4.0% in 2022 and 3.5% in 2023.

Large centralized economies needed to be careful about their decisions, because they could overwhelm small and starting businesses with too muchfundingorregulations.

At the beginning of the pandemic, Japan's government expanded the stimulus programmes that were initially intended for small enterprises, to include financing for medium and large companies. The programme now involves government-backed lenders in Japan providing specific loans to all companies affected by pandemics. The loans are also better accessible by companies, because of lowerinterest rate(around 1% instead of usual 5%) and there is no need for loans to be coordinated withprivate lenders.

Decentralized

Decentralized and local governments chose a way of higher independence for states andmunicipalities.Businesses had a wide field to operate andmaximizetheir profits under thepremisethat they would make more job opportunities and would bring more money into their local economies.

Aside from letting companies maximize their profits, these governments also had an option to free up and redistribute central governmentresourcesto localinstitutions.For instance, there was a local government approach to economic recovery in Mexico. The government supported local tourism, which was highly affected by pandemics. Although the Government implemented reduced capacity measures, and health and safety protocols, they did not mandate any protocol that would have made visitor entry difficult. For example, they decided to not require international travelers be vaccinated before their arrival in the country.

See also

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