Economist predicts long road to recovery

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Print this page by Paula Crawford Squires

The recession should end by 2010. Just don’t expect the recovery to feel good right away. And when it comes to lending for commercial projects, the environment “will be absolutely horrific,” economist Mark P. Vitner told a group of Richmond real estate professionals today. 

Vitner, a Charlotte-based managing director and senior economist for Wachovia, was the speaker for a meeting of Virginia Commonwealth University’s Real Estate Circle of Excellence. The event drew about 60 people who came to hear Vitner’s view on where the economy went wrong and what the industry can expect in the near future.

Recessions, he said, are economic corrections that result from imbalances, which build up during boom times. During this downturn — the deepest recession since the 1930s — Vitner predicted it will take time for imbalances to play out in four areas: an oversupply of housing, overleveraged households, a huge trade imbalance, and big growth in the financial services sector, which devised new products to meet the demand for home mortgages.  The road to recovery will be long, he added, because of the recession’s unique characteristics; namely massive job losses and a negative compound annual growth rate for GDP (gross domestic product)  expected to hit -2.7 percent by the end of this year.

Just as the 1973-75 recession marked the end of cheap energy in America, Vitner noted that this recession will be transformational as well, marking the end of easy and abundant credit. The turning off of the spigot is occurring at a time when billions of dollars worth of debt on commercial projects are coming due or are up for refinancing. With the CMBS (commercial mortgage-backed securities) market dead and banks struggling to raise capital, some real estate companies are gearing up for an expected increase in defaults and foreclosures on commercial projects. They’ve created asset-recovery units to assist in the sale of distressed properties.

Vitner looks for the economy to be back in uptick mode by 2012 and 2013. However, higher taxes and interest rates resulting from what could be a $5 trillion dollar federal deficit could give rise to a scenario of stagflation between 2013 and 2020.  Continuing population growth for Virginia and Northern Virginia’s proximity to increased federal spending associated with President Barack Obama’s stimulus plan will help Virginia weather the recession, he said.

Lest he sound too grim, Vitner encouraged the audience to read a report he wrote recently for Wachovia entitled, “This is Not the End of America.”  In the report, he says, “Clearly this crisis does not mark the end of America.” Fiscal policy, Federal Reserve action, the $867 billion federal stimulus package and the restoration of confidence in the banking and broader financial markets will all play a role in the economy’s recovery.  Plus, Vitner points out that the country needs to learn lessons from the past and look forward. “The most recent expansion and subsequent downturn suggest we have reached the limits of how far increased leverage can paper over our long-run structural imbalances,” he writers. “… We need a ‘Sputnik moment’ to reinvigorate the drive to boost productivity throughout the economy”.

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