The economy contracted by 6.1% in the first quarter of the year. This follows a 6.3% contraction in the last quarter of 2008. Q3 of 08 featured a .5% decline.
This means that this quarter, the economy will have to grow by 13 percent just to get back to where we were at the same quarter of the previous year. Hands up who thinks that is going to happen?
Now let’s assume that the worst is indeed behind us and the economy is only contracting half as fast as it has been for the past six months. That is still a 3 percent decline in GDP for Q2 of 09. If that is the case, the we are talking about a solid year of economic contraction which will not be recovered in 2009.
More importantly, inflation. The extent of the contraction thus far indicates that money is out of circulation, moving at a very low velocity. The instant those GDP numbers turn positive I’d expect to see double-digit inflation, at least for a quarter or two, as productivity tries to recover and “soak up” all the excess cash.
In that environment, say even 2 percent growth with 5 or 6 percent inflation, is that really growth — or an illusion?
