A new threat of recession

The speech which US President Barack Obama is due to deliver on Thursday concerning his administration's responses to the renewed deterioration in economic activity, and particularly that of the labor market, has understandably aroused expectations.

The data made known last Friday revealed that in August, for the first time in a year, there was hardly any net growth in US employment. The 17,000 new jobs created by companies were amply offset by the jobs destroyed by the government itself. The figures for jobs created in June and July were also significantly revised downward. The unemployment rate remained at 9.1 percent, the number of man-hours worked in August descended, and so did the average remuneration per man-hour.

These figures confirm the deceleration that has taken place in all the advanced economies and some emerging ones too beginning in the second quarter. So much so, that a relapse into a new recession ? as Christine Legarde, the managing director of the International Monetary Fund, has warned ? is again looming on the horizon; certainly in some world economies such as that of the United States, and in some European ones, such as Spain. In the most likely scenario, in the third quarter stagnation will set in. This perception, together with the continuing financial instability, is eroding the confidence of companies and households, which will clearly translate into adverse effects on the generation of income, and on spending decisions.

In the face of this situation, it is likely that Obama will announce a plan for rapid creation of employment, with incentives to companies that hire unemployed persons, as well as increased investment in public works. A priority of this sort will hardly be open to question in a political ambience where the reduction of unemployment is normally placed ahead of any other objective. It is also likely that the Federal Reserve itself will finally yield to this pressure, and implement new measures of monetary stimulus. The threats to employment are much more explicit than those concerning possible upturns in inflation.

In so far as these threats of stagnation are by no means exclusive to the world's largest national economy, it seems reasonable that stimulus policies ought to take the place of the radical austerity rhetoric still dominant in the euro zone, which is feared even by the financial markets. And rightly: in the absence of growth of demand, employee remunerations will fall, profits will go on shrinking, and with them, investment. Debts, both private and public, will become unpayable, and the banks will suffer. This is not an exclusively American tableau: in Europe some of the principal economies are already suffering. As the IMF itself has suggested, governments must be aware that in the short term it is urgently necessary to steer clear of this vicious circle, while in the middle term this course can be perfectly compatible with a firm commitment to a healthy restructuring of public finances.