WISHFUL THINKING ?

In recent weeks there have been glimmers of hope that economic recovery may be just a little further down the road. Major share markets have recovered some of their massive losses. Some first quarter banking company results were not as bad as feared. Housing starts in the US are not declining as fast as before. The government elections in India boosted the emerging economy, as did the clear election result there.

Government leaders around the world are understandably highlighting every piece of good news, or at least, not as bad as feared news, and the media often tends to go along. After all, everyone is hoping that the worst may be over.

Unfortunately, however, there is still plenty of bad news. During the first quarter of 2009 Europe had its worst fall in GDP since the Second World War. The IMF still sees no recovery before late 2010, if then. The impact of the financial crisis on the real economy continues. World trade stagnates - countless ships lie idle off Singapore and other major ports. Worst of all, job losses continue to grow.

So are the politicians, and the media, engaging in wishful thinking?

The reality is that no one really knows when recovery will begin. The very fact that optimists are now predicting (hoping for, wishing for?) recovery in 2010 is itself an indicator. Less than a year ago, these were the people talking of an upturn in 2009.

Writing in the Washington Post, David Ignatius suggests something more fundamental is blocking recovery. “What if the mistake of the ‘90s was that we strapped a casino to our economy and let the roulette wheel take control?” he asks. Ignatius makes the point that so-called “toxic assets” are still clogging the financial system and are unlikely to be cleared by government initiatives (including the Federal US government’s public-private investment program - known as P-PIP).

Beyond that is a general point that unless and until the fundamentals of our economies are placed on solid foundations, rather than on the quick-sands of speculation, recovery will be illusionary. Investment in education and training is one key factor in building those solid foundations.

Without such investment, politicians and officials tempted by creative financial engineering along the lines of P-PIP and equivalents in other countries are likely to find that their hopes for economic recovery are just so much wishful thinking.