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We find ourselves at a time when economic news is changing continually

Positive and negative reports follow each other like clockwork, which makes it difficult to determine the underlying trend with any great certainty.

The daily fluctuations in share prices are indicative of this uncertainty. In the three months to the end of August the Standard & Poor's 500 Index in the US changed direction 32 times out of a total of 64 trading days.

In the case of the JSE All Share Index it was 30 times.

This fluctuation in share prices has been in response to the continued release of new economic data and the pronouncements of economic policy-makers and is a reflection of the general lack of direction.

The thought framework, which for the past three decades has provided the context within which decision-makers could make sense of what was happening around them, is no longer working, and this has resulted in unusual uncertainty.

In slightly more than a month the focus of the macro-economic debate has switched from the question of when economic policy should be tightened to avoid the risk of higher inflation, to the fear that we are on the eve of a second recession or even deflation (the so-called double-dip scenario), especially in the US.

To my mind the continued change in sentiment is the result of a poor understanding of the fundamental shock to which the global economy was subjected during the past three years.

From the beginning it was clear that it was not just a normal cyclical downswing in the economy that would shortly be followed by a normal cyclical upswing.

History has undeniably shown that the recovery after a bank crisis (which often results from a collapse in the housing market), such as Western countries have been experiencing since 2007, is prolonged and difficult.

Therefore the situation could not be resolved by standard anti-cyclical monetary and fiscal policy, but called for radical structural adjustments.

At most, anti-cyclical macro-economic policy has helped to stabilise the situation, but it was clear from the outset that the economy would start faltering once these measures have run their course.

For example, measures such as subsidies aimed at encouraging consumers to buy houses, cars and other durable goods do not create wealth - they are merely incentives to advance the purchase of such items.

As the subsidies are inevitably of a temporary nature, the contraction that would follow once they have expired was a foregone conclusion. The current economic slowdown is therefore not unexpected at all.

The problem is partly that during the past two decades firm resistance has built up against any recession of whatever nature.

This resulted in asymmetrical policy in terms of which any deterioration in economic conditions was strongly resisted, while the extravagance to the other side was not only tolerated but condoned.

This attitude regarding the economic cycle played a significant role in the run-up to the financial crisis, especially in the US.

In their book, This Time is Different. Eight Centuries of Financial Folly, Carmen Reinhart and Kenneth Rogoff documented the lessons to be learnt from the numerous examples of financial crises in history.

As far as the fallout of such a crisis is concerned, they made the following observations:

• The downswing in real house prices associated with such a crisis usually lasts six years. It could take up to ten years for house prices to return to the pre-crisis level.
• The decline in real equity prices is sharper than in house prices, but does not last as long - on average only three and a half years. True to the nature of the equity market to discount future events, equity prices reach a high a year before the crisis reaches breaking point, and then recover within three years to the pre-crisis level.
• The higher unemployment lasts five years on average and takes longer to return to the pre-crisis level. For example, it would take the US 12,5 years to reduce its unemployment rate to the pre-crisis level, taking into account new entries to the labour market at the normal rate and if the economy created 208 000 jobs every month (the average in 2005, which was the best year for job creation in the 2000s).
• The time lapse from the high to the low in real per capita GDP is two years. However, the recessions that follow financial crises last twice as long as normal recessions and GDP takes four and a half years on average to return to the pre-crisis level.
• Public debt rises sharply as a result of a sharp decline in tax revenue, and it usually takes between ten and fifteen years for the fiscal situation to be consolidated.

One of the reasons given for the development of the financial crisis is the excessive focus on short-term considerations in the private sector, especially financial institutions.

It is quite possible that this mistake is now being repeated in the evaluation of the post-crisis scenario in that a long-term perspective is lacking.

It is a fact that the financial crisis is only three years old and, if one views it in the context of Reinhart and Rogoff's research as summarised above, it is clear that we are still in the midst of the adjustment process.

Although we may already have seen the low, several years of relatively low economic growth, with many pitfalls, could be in store for the world.

The graph below shows the long-term growth performance of the American economy.

The only period one could describe as a double-dip recession is 1980-82 but, unlike at present, monetary policy was extremely tight at that stage to combat inflation, not deflation. Therefore a resumption of the recession remains unlikely.

In the meantime economic news will remain changeable and the possibility of a double-dip recession will still be raised.

By implication South Africa will not be able to rely on international windfalls to sustain the economy, and domestic structural reforms will have a crucial effect on growth possibilities.

However, if one considers the current events in the South African economy, one would think we are living on another planet.