Recovery in 2009? Forget about it, says authoritative US study

Here’s a proper question: when will the downturn end?

Like many optimists in adland, Moray MacLennan, the IPA’s president and worldwide chief executive at M&C Saatchi, suggests we might dare to hope for ad spend declines to “bottom out in autumn”.

He means autumn 2009, mind. But “bottoming out” is a guarded phrase. It doesn’t imply an upturn. And the exit route from recession is always slow. But how slow?

For some historical data, we can turn to Carmen Reinhart of Maryland University and Kenneth Rogoff of Harvard University.

Reinhart and Rogoff have studied dozens of banking-led recessions, most of which occurred during the past century. 

The point is that banking-led recessions (like the current one) tend to be more severe than common-or-garden variety.

As it turns out, the average duration of peak-to-trough contraction in real per capita GDP during the 14 recessions studied by Reinhart and Rogoff is 1.9 years.

In the UK’s case, real GDP started to decline from its peak in Q3 2008. 

If we conform to the historical average, GDP should bottom out during the second half of 2010. We should anticipate a resumption of economic growth during late 2010 or early 2011.

Traditionally, GDP growth is a good proxy for ad spend growth. The two tend to travel in tandem. When producers make more goods, they need to find a way of selling them.

Accordingly, the Reinhart-Rogoff figures suggest that hopes of a recovery in ad spend at any point during 2009 are misplaced.

The only saving grace? As time goes on, we can expect the percentage declines to start flattening out. During 2010, most publishers and sales managers should become accustomed to watching figures on graphs that move sideways, not upwards or downwards. 

In the case of investors with money burning a hole in their pocket, it’s not entirely stupid to ask: what will recovery look like?

It doesn’t take a genius to forecast that B2B media will lead the way. I’ve got the two reasons for forecasting this.

The first is the vast quantities of taxpayer cash that will shortly start being ploughed into infrastructure projects.

It will take time before consumers benefit from new schools and new telecoms infrastructure. But for B2B companies, from building contractors to BT, the benefits should be instantaneous. The media that exist to serve these companies will benefit, too.

My second reason involves the continuing problems of the consumer economy.

Even if GDP starts growing again in 2010/2011, debt, unemployment and declining house prices will continue to act as a brake on the recovery of consumer-facing ad markets.

According to Reinhart-Rogoff, unemployment continues to rise for 4.8 years from trough to peak on average during banking-led recessions. On this basis, the start of recovery in the UK jobs market would be delayed until mid-2013 (always assuming that we conform to the average).

House prices decline, on average, for six years from their peak. From the market’s pinnacle in August 2007, this –- once again — suggests that we’ll see the first house price rises during 2013.

Beyond this, you also need to factor into the equation the psychological scars inflicted on consumers by a deep recession. In the mid-1990s, for example, long after the end of the Major recession, memories of negative equity still acted as a powerful break on parts of the property market.

It will take a long time for the British consumer to rediscover her mojo. The good news, I guess, is that we can probably look forward to the start of a respectably-sized boomlet in or around 2015.

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