'Green shoots' recovery talk taboo

The optimistic 'green shoots' phrase is taboo in the UK

It was Ben Bernanke who first used the phrase. "I think all of our efforts so far have produced results," the Federal Reserve chairman said in a US television interview last month. "And I think as those green shoots begin to appear in different markets, and as some confidence begins to come back, that will begin the positive dynamic that brings our economy back."

The phrase "green shoots" has been taboo in Britain since Norman Lamont, then Chancellor of the Exchequer, prematurely identified them during the depths of the Nineties recession. Two UK ministers have been rebuked for using the phrase this year, so do not expect anyone else to utter them until there is a veritable forest of foliage all about.

On the other side of the pond, however, economists are firmly on green shoots watch. There is plenty of debate about just how fast these shoots may grow, and still a sizeable cadre of experts who think they are about to succumb to an ongoing economic front. But at this point, this spring, there are green shoots to be counted.

They have emerged first in the housing market.

A couple of events yesterday illustrate what Mr Bernanke was talking about. The Fed was in the credit markets buying up US government debt, as part of its latest "quantitative easing" effort. It has promised to spend $US300bn buying Treasuries, and more than $US1 trillion buying mortgage-backed securities, to help drive down interest rates, in particular on mortgages.

Also yesterday, the Mortgage Bankers Association said that applications for mortgages rose last week, as borrowers moved to take advantage of historically low rates. The average American homebuyer can get a 30-year fixed-rate mortgage at 4.73 per cent this week, far below the 5.78 per cent of a year ago, reflecting the success of the Fed's moves to ungum the mortgage markets, which had been stubbornly refusing to pass on lower official interest rates until recently.

And more mortgage applications will mean more activity in the moribund housing market, too, because yesterday's figures showed a rise in loans for purchases, not just in refinancings of existing loans. Both could have a useful economic effect: more purchases helping to mitigate the decline in house prices, and refinancing easing the pressure on cash-strapped borrowers.

Bob Walters, chief economist at Quicken Loans, an online mortgage lender in Michigan, said: "While credit guidelines remain stringent, there are plenty of qualified folks who are putting more money back in their pockets by locking in a low rate. Incentives like the first-time home buyer tax credit are also helping to generate increased purchase activity."

The US housing market, of course, is at epicentre of the financial earthquake of the past two years. The inability of borrowers to refinance has led to a surge in foreclosures, a glut of foreclosed homes driving down prices, and a giant hole in the balance sheets of the nation's banks, which loaded up on risky mortgage-related securities.

This downward spiral won't be fully arrested until house prices stabilise, but increased sales activity bring the bottom nearer. House prices are still falling at an annual rate of 19 per cent, and more than two-fifths of all sales are by banks who have repossessed the property or by borrowers in financial difficulty. However, the number of second-hand home sales was up 5 per cent in February, and yesterday's news on mortgage applications bodes well for the spring selling season.

The Fed is operating the biggest government intervention in financial markets in history, and it has succeeded in thawing what was a total freeze in activity in the weeks after Lehman Brothers' failure last September. Traders points to signs of life everywhere. The interest rate banks charge each other, called Libor, is a quarter of what it was when the crisis was at its worst. Investors in corporate bonds are demanding a much smaller interest-rate premium over Treasuries to compensate for the risk they are taking, reflecting a slow return of confidence. Meanwhile, companies with strong credit ratings issued the same amount of debt in the first quarter of this year as they did in the same period in 2008, something that could not be said for the previous three months. None of these measures is back to pre-credit crisis levels, but they prove that the markets are no longer locked entirely.

The stock market, too, is optimistic. The S&P 500, which measures the broad market of US shares, is up 22 per cent from its March low. Investors have become light-headed before, of course, only to fall back into a funk, but the rally does at least add to the value of Americans' savings, and could help boost confidence.

And there is the bull case, that as these green shoots become apparent, they will ease the fear that has paralysed consumers since last September and slowly restore consumer spending, the engine of the US economy, accounting for almost 70 per cent of GDP. There were modest month-on-month increases in consumer spending in January and February in the US, and the hope is that these can be built upon.

As for business confidence, that is still shaky, according to a Business Roundtable survey yesterday, which said an economic revival is still more than six months away. In the interim, executives expect to cut more jobs and adjust to even lower sales.

However, the optimists point to the substantial adjustments that have already been made n painfully so, as evidenced by the 5 million job cuts in the US since the recession began in December 2007. The stock market went up again yesterday despite terrible figures from companies reporting their earnings and despite gloomy prognoses from these companies' executives. What traders and economists were looking at was the speed with which companies have cut their inventories, their backlog of unsold goods. These speedy adjustments mean an upturn in demand could pass through into new jobs and higher profits pretty quickly.

There is another phrase to keep in mind alongside "green shoots", and that is "head fake". This is the bears' new favourite phrase. Meredith Whitney, the banking analyst who correctly predicted the capital shortfall that would engulf Citigroup and other major players, now predicts that house prices will fall, peak-to-trough, by 50 per cent, overwhelming any effect from the current uptick in sales, which would be exposed as "a head fake". Economists at Morgan Stanley, in a report yesterday, said businesses are still locked into a cycle of falling demand that will require still more cutbacks and job losses, and any second-quarter improvement in GDP would be "more of a temporary head fake than the beginning of a sustained revival, given how little progress has been made so far in addressing the underlying credit and housing market problems plaguing the economy".

Powerful players, though, are starting to come through with some bold pronouncements. None is bolder than that from the strategists at Barclays Capital in London, who have titled their latest quarterly outlook document: Green Shoots Have Arrived.

Government stimulus packages and interest rate cuts around the world have the desired effect, and there are already signs of stabilisation in some emerging market economies in Asia, Barclays says, which will help reboot global trade.

"The bear market is probably over," they say, "Current market pricing reflects an extremely pessimistic set of economic assumptions that will not be hard to beat, and the global recession is starting to bottom out. Although the turn could take some time, the economic news will go from all bad to somewhat mixed to better over the next three months."

THE INDEPENDENT