Has the economy turned the corner? A SmartCompany Q&A

We’ve been talking about the “green shoots” of recovery for some time now, but it seems that even central bankers are getting more optimistic about the chances of economic recovery.

Yesterday, the Reserve Bank of Australia released the minutes of its latest meeting and the message was clear – it looks like the worst is behind us.

Over in the United States, Federal Reserve chairman Ben Bernanke also flagged “some improvements in economic prospects”.

So have we really tuned the corner? Time for a SmartCompany Q&A.

The central bankers tend to be pretty cautious types. Just how upbeat are they?

It’s a good point – RBA Governor Glenn Stevens and Ben Bernanke have to choose their words very carefully and are traditionally cautious, which means we need to read between the lines a bit.

Economists say the key bit of language from Stevens was that “downside risks to growth have diminished”. Stevens also said “the outlook thus remained for a gradual recovery to begin later in the year”.

Later in the year? That does sound pretty positive. What did big Ben say?

Bernanke, who was making his semi-annual report on the economy to Congress, told representatives that “better conditions in financial markets have been accompanied by some improvement in economic prospects”.

That also sounds good. We’re on the way back…

Hang on.

Here we go. You’re about to say there’s a big “but” attached to all this, aren’t you?

Sorry, but there is a big caveat on all this recovery talk. Bernanke said unemployment in the US is continuing to rise steeply and has warned that the jobless rate could actually undermine any recovery that gets underway.

The same is true for the Australian economy, where the rising unemployment rate is seen as the big bogey our economy needs to defeat.

However, there is some better news on that front. Economists are reducing their predictions for the jobless rate (Access Economists now expects unemployment to peak at 7.5%, down from 8.5%) and Stevens said yesterday that while “labour market indicators were likely to remain soft for some time… there were signs that employers were making efforts to minimise job shedding”.

Any other worries?

The global economy still looks pretty shaky and trade is likely to be subdued for some time. We still don’t know if the world’s banks are completely free of their balance sheet problems. And, as Stevens pointed out yesterday, the big increase in government debt around the world is a problem we’re still yet to confront.

I’m suddenly feeling like we are a long way from that corner. Any other dramas?

Well, the traditional pattern of recessions says that SMEs suffer a long time after the economy has officially turned the corner. That’s certainly the opinion of insolvency experts, who are expecting SMEs and particularly retailers to be hit hard as the jobless rate jumps over the next 12 to 18 months.

Great. You’ve almost killed my optimism. Can you please cheer me up with something?

Sure. Both Bernanke and Stevens indicated that they are prepared to decrease rates if the recovery looks like stuttering and believe interest rates will remain low for the medium-term.

As everyone from Kevin Rudd down has been saying, the Australian economy is not out of the woods yet. But despite the world’s worst downturn since the Great Depression, we have held up remarkably well and conditions continue to improve. The recovery looks likely to be painfully slow, but at least it doesn’t appear to be too far from getting underway.