Sinking Into Recession

Financial markets deal in numbers all day every day, but yesterday afternoon one new figure stood out: 63,000. That was the number of jobs lost in America last month alone, according to yesterday's non-farm payrolls. That marks the fastest fall-off in the labor market in five years and is the surest sign yet that the US is in recession.

The R word is not to be used lightly. For economists, recessions have a specific definition: two straight quarters of falling national income, which will only be confirmed much later this year. For governments, too, it is a term to be avoided on account of its toxic political implications. No wonder the US commerce secretary, Carlos Gutierrez, was careful yesterday to avoid the word, preferring the rather more agreeable euphemism "slowdown". But it is not just excitable journalists who talk of America being in recession; perfectly conventional economists concede the point too. After all, this week alone there has been disclosure of a record number of home repossessions and a warning from America's chief central banker, Ben Bernanke, that more foreclosures will follow. So the average American is now living in an economy where the jobs market is tanking, where housing is in the middle of its worst slump in recent history - and where food and energy prices are rocketing. Going by the old rule that if it looks, walks and quacks like a duck then it probably is one, America is in recession and yesterday afternoon marks the exact moment when the world got final proof.

As financial markets have woken up to that reality, and to the possibility that the American downturn will last for many months to come, they have come in for a painful beating. Stock markets from Tokyo to London to New York were in the red yesterday, while the dollar has hit a series of record lows against the euro. Of these various casualties, the US currency may be the most important for the rest of the world. First, its decline reduces the value of US assets held by foreigners. Second, it is a big headache for countries that peg their currencies to the dollar. Many Middle Eastern states will be watching the value of their currencies fall along with that of the dollar, when what they really need is for their currencies to strengthen so as to temper inflationary pressure. Finally, a falling dollar makes US exports cheaper than the competition. In normal times this would be a good thing: Americans have not exported enough but have instead bought and borrowed too much for too long. A period of putting the other foot forward would be welcome. The trouble is, these are not normal times: this is the worst period for the world economy in well over a decade. Other countries also want to export as much as they can. The US has slashed interest rates and had a massive giveaway in tax cuts. But none of that has seemed to help. All that breezy talk at the turn of this year about how China and India would serve as the new economic motor for the world was always optimistic; now it looks foolish as well.

America's recession has political implications too, and these are bound be felt further afield than the US presidential primaries. They will be felt in Downing Street this weekend, for instance, as Alistair Darling puts the finishing touches to his maiden budget speech. Delivering a UK budget during a global credit crunch is a bit like taking a raft out on to the Pacific Ocean when it is in choppy mood, but there is one big policy the chancellor can invoke to help Britain weather the storm: to be much more relaxed than his predecessor about his fiscal respectability, in particular that rule about public debt not exceeding 40% of national income. The nationalization of Northern Rock has already broken that rule. Fixing the black hole in public finances will have to be done at some point, but it can wait until the UK and world economy is in better shape. For now, the key is to avoid the UK following the US into recession.