THE BLOG
04/05/2013 09:45 am ET | Updated Jun 05, 2013

Have We Psyched Ourselves Into Permanent Low Growth?

The fear factor has been a dominant feature of the recent economic landscape. The chaos of crisis in 2009 plunged confidence indicators to depths previously unexplored in recent history. Four years later, sentiment is mired at recessionary levels, in spite of serious attempts to break free. Are we now psyched out, resigned to a gloomy future, or is there light at the end of this long, dark tunnel?

Gauging sentiment is complicated by its very dynamic. Pessimism has three s's for a reason: first, pessimism sells. Gloomy headlines are far more likely to be read than upbeat ones. Proliferation of hi-tech communication media has only fed this appetite. Second, pessimism spreads. Remember, gossip is only good when it's juicy. But pessimism's most sinister quality is its tendency to be self-fulfilling. And the longer pessimism lingers, the more it seems to condition our behaviour.

Multiple indicators point to the persistence of current pessimism. Europe initially recovered from its depressionary funk in 2009, but has since tumbled back decidedly into a recessionary zone - thanks to GDP's current doldrums. Japan's mood has been below the line since the crisis, even though the pre-crisis period wasn't overwhelmingly positive. U.S. consumer confidence never really did recover. Oh, it didn't stay is the 2009 abyss, but three subsequent attempts to break out of recessionary gloom have failed -- very unusual for this typically 'glass-half-full' set. What is worse, U.S. confidence is now more volatile than at other points in the crisis, in spite of a recent bevy of upbeat indicators.

Are there any signs that might indicate a turnaround? Look to financial markets. Following the ECB's 'whatever-it-takes' announcement last fall, Euro area bond spreads have steadily narrowed, with the exception of Portugal alone. Nominal bond rates have also narrowed over this time, further suggesting greater calm in financial markets over near-term prospects. Big jolts to the system could change this, but so far, so good, in spite of the Italian election and the Cyprus issue.

Bank lending is also showing signs of easing. Commercial and industrial lending is on a tear stateside, and mortgage lending is convincingly on the rise. A mid-2012 lending relapse in Europe seems to be on the mend, although tilted more toward short-term lending. Signs of stabilization are evident in large emerging markets, while care is being taken not to re-stoke inflation. On the whole, though, it's a sign that borrowers and lenders are getting somewhat more adventurous.

Another related feature seems to be taking hold. Following wave after wave of bad news, there is some evidence of 'fright fatigue'. Whether a financial or fiscal jolt, or even a punishing natural disaster, success at managing the plethora of post-crisis events has created an underlying confidence that policymakers are generally getting it right -- a feeling that may well support a sustained rise in risk-taking, which itself can be self-fulfilling -- this time, in a very positive sense.

In addition, one further observation: it's never fair to conclude that pessimism has the better of us until the economy has dealt with boom-time excesses. Evidence points to a five-year period of excess, which the last four years have largely sopped up. If so, it remains to be seen whether natural forces are now going to work, increasing demand in a way that will finally restore confidence.

The bottom line? Persistence alone is not a good enough reason to conclude that confidence is gone for good. It may take some convincing, but our suppressed spirits may well be lifting, to great effect.