Read this morning that another 500 US banks could fail as a result of unemployment rising ,defaults on consumer loans increasing and commercial real-estate losses starting to soar. Hardly surprising when you think of the amount of deleveraging that's going on. Commerzbank and West LB in Germany have effectively seen their blalnce sheets halved.
Against this backdrop of tighter credit access what is the economy going to be like once we emerge from this downturn? Analysts talk about V, U, or W shaped recovery from the recession but in the absence of the consumer isn't this overly optimistic? What if it's none of the above and the economy is instead on a ' -- ' shaped track ? What would it mean if the 10% or so reduction in global output caused by this downturn doesn't ever come back? Sure, there will be inventory restocking from a very low level and sure families will eventually replace their ageing vehicles . Together this will stop the decline in output but replacements as a motor for growth are going to make the recovery very shallow. Compared with where we were two years ago there is bound to be a lot of surplus capacity in the system and a lot of capital expansion plans that will be scaled back permanently.
In a 'repression' governments will have to scale back services to balance the books and avoid bankruptcy, indirect taxation will have to rise ( VAT at 20% ) to pay for higher structural unemployment, and bank lending will have to be more tightly regulated to avoid a repertition of the crisis.Taken together this points to continued weak demand, softness in exports and continued weakness in corporate earnings.