Storm warning – the sequel

I have refrained from any comment on economics recently, but I see worrying trends developing again. I really don’t want to go into details as this is a backpacking blog! However, there are a number of things that make me think that next year Western economies could suffer a relapse, perhaps even a recession:

  • The ECRI (Economic Cycle Research Institute) leading indicator for the US has weakened markedly since the end of April. While this does not necessarily mean the US will go into recession (yet), it does suggest that the cyclical rebound in economic activity will wane next year.
  • US M3 growth has collapsed. OK this is really technical and many economists will not agree with this, but ultimately money supply influences economic activity. The Fed doesn’t care about M3, but I think they are making a huge mistake. M3 heavily influences credit and economic activity over the long-term. I’ll leave it at that, as I could write a whole post on this!
  • Austerity in Europe. All European countries are adopting ever more draconian budget deficit reduction plans. Individually these make sense but collectively they could drive Europe into another recession. As Europe is the UK’s main trading partner, the hope that an improving trade account might boost growth could be dashed.
  • Deflationary spirals. I think that Southern Europe will go through a period of deflation, which will be extremely painful and destabilising. This is not really in economic forecasts yet, but it is almost certain as aggregate demand must fall as government spending is slashed. Without being able to adjust currency parities within the Eurozone, the general price level of these countries must fall to restore competitiveness. Given that German inflation is very low, this means serious deflation. Deflation is death for debtors and the banking system.
  • Banks are struggling to fund. Banks in the weaker Eurozone countries are struggling to fund their lending in money markets. This means they will shrink lending and charge higher real interest rates. Given that the Eurozone tends to rely more on bank lending for financing, this will depress economic activity next year. This is the credit crunch part 2. While the UK is in a slightly better position, bank funding is still fragile.
  • Inflationary pressures in Asia. India has an inflation rate of 10% and Chinese inflation is rising. Sure some currency appreciation would help but by next year, Asia could be facing an inflationary problem that requires some stiff monetary medicine.

I could give you more reasons to worry, but that’s enough for the moment. I’m almost certain that the Eurozone will suffer much weaker growth and probably a recession next year. It is highly likely that this will make growth weak in the UK, although a recession might be avoided as the UK is lagging in this economic cycle. If you want a simple guide to what’s going on at the moment, have a look at EconomicsHelp .

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5 thoughts on “Storm warning – the sequel”

  1. Thanks. I find this interesting. So many people have particular political axes to grind (I presume you don’t?) but I am also concerned that actions around the world may lead to the “double dip” recession.

    1. I’m just someone who has incresingly been drawn (and fascinated) by macroeconomics over the past few years. Most people are too busy looking at their shoe laces and miss the big picture. I wouldn’t class myself as being of any strong political persuasion, except perhaps being of a libertarian persuasion. I am concerned about excessive state direction, but also believe that untrammelled free markets are not the answer as well. It beggars belief that Gordon Brown doesn’t realise that his excessive spending at the peak of the economic cycle landed us in this mess with excessive public sector borrowing.

  2. Being long term unemployed and for a variety of reasons unlikely to resume employment again, I have noticed the change in the economic climate. Certainly I feel it strongly on a personal level, every penney I spend on shopping has to be weighed, ‘do I need this or that item? Meat and fish is off the menu my diet has become frugal, I have noticed substantial price hikes in my local supermarket, food is slowly becoming a luxury! On the gear front it is a case of make and mend, my waterproof trousers are about eight years old and are wearing thin and sporting several patches, boots, well mine ought to be retired but again, it is cost, getting out on the hill now means sacrifices in other areas. This latest budget scares me and I am one of the lucky ones in that I am single. The poor have just got poorer and a lot of folk are becoming disillusioned and angry. By the by, I am a non political type but I do believe that the rank and file politicians are out of touch with the likes of we

  3. Yippee. I have missed your occasional posts on economic matters. I’m not convinced about the potential for inflationary pressure in Asia, but otherwise there’s nothing to argue with. A bit depressing, mind.

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