The unbelievable creditless recovery

Give it three years after having touched the rock bottom point of the cycle and most economies will begin to recover, even without real credit refills. The assertion, recently made by Zsolt Darvas–research fellow at international economics think tank Bruegel–probably hit with an acute sense of despair those in the euro periphery longing for a European Central Bank that could inject liquidity at the scale of the Bank of England and the Federal Reserve in the US. Or setting negative interest rates on banks’ deposits at central banks if needed in order to force their lending money.

But Darvas’ report seems clear: he has collected data from 135 countries and covered the last 50 years. The results suggest that “creditless recoveries,” in which the stock of real credit doesn’t return to the pre-crisis levels, are not rare. The figures in the paper show real GDP growth can reach rates of 4.7 percent per year in middle-income countries and 3.2 percent per year in high-income countries.

The eurozone is a more confusing case, though. Take a classic indicator of economic activity, the manufacturing purchasing managers’ index: in February, it rose in Spain–a country name often used as a synonym for eurocrisis–to 46.8 from 46.1 while falling in Italy by 2 points to 45.8, and remaining under 44 in a core euro tower like France.

To be sure, all of them recorded contractions, as numbers were below the mark of the 50 points. And credit is lacking as ever. In January, credit to the private sector dropped by -0.3 percent since December 2012 to -4.1 percent. So, five years into the most global financial crisis, should the Eurogroup consider a change of course in its meeting today?

And what about the ECB? In the Bruegel study, one of the two caveats highlighted–the other being that creditless recoveries are much less common in high-income countries–is that creditless recoveries were associated with significant real exchange rate depreciation, “which has hardly occurred so far in most of Europe.”

“This stylised fact suggests,” said Darvas, “that it might be difficult to re-establish economic growth in the absence of sizeable real exchange rate depreciation, if credit growth does not return.”

Indeed. The euro area’s unemployment rate in January crawled up again to 11.9 percent from 11.8 the previous month, with the usual suspects leading the way: Greece (27 percent), Spain (26 percent), Portugal (17.6 percent) and Italy (11.7 percent). Tellingly, France is not far behind them, at 10.6 percent.