MacroScope is pleased to post the following from guest blogger James Carrick.  Carrick is economist at UK fund firm Legal & General Investment Management. He says here old patterns of lending are unlikely to return and that this means slow growth in developed countries.

“Despite £175 billion of quantitative easing, bank lending in the UK remains weak, threatening to restrain the economic recovery and equity market rally. 

Policy makers in the developed world have been working overtime to encourage banks to lend at the ‘normal’ levels experienced during the past decade. However, these “normal” levels are no longer realistic. The factors which contributed to the secular rise in debt over the past decade are now reversing. Populations are ageing, interest rates can’t go any lower and sub-prime lending is over.

As a result, higher levels of savings (where consumers pay down debt) and lower spending will weigh on the pace of the recovery.

This is not to predict a double-dip recession. Instead we are probably in store for a more subdued period of growth next year as households can no longer borrow money they don’t have, and unemployment remains high.

On the flip-side, while consumers in the developed world are still suffering a hangover from the credit-crunch, the debt party in many emerging economies is still in full swing.

This suggests that companies with exposure to the developing world will fare better.”

It’s starting to look like the Summer of Love. Two reasons: The recovery is taking on a L-U-V shape globally, and it’s going to require huge amounts of love and nurturing to keep growth alive.

• L stands for Europe, where slowness to confront deep damage and write down the remaining $500 billion odd in bad bank debt, mean rebuilding will be protracted and painful.
• The United States sports a U, bouncing along bottom right. But its financial giants swallowed harsh medicine early and the U.S. has the flexibility to stage an impressive rebound, if not undone by a fast-rising jobless rate at 9.5 percent and heavily indebted consumers.
• V stands for Asia (ex Japan), the surprise region showing resiliency, thanks to its rapid Q4/Q1 inventory workdown and huge infrastructure spend by China.

Like the Summer of Love 41 years ago, it is a drug-fueled affair. G20 governments are peddling $820 billion in stimulus this year, equivalent to 2 percent of GDP. Central bankers are spending even more. The Fed has doubled its balance sheet to $2.04 trillion the past 12 months.

These actions might have cushioned a severe cyclical downturn but the structural adjustment to a world of costlier credit is only just beginning.

Will politicians and central bankers have the wisdom or the stomach to keep the drug supply going long enough to prevent L-U-V from turning into an ugly W?

Interesting take on the rise in commodity prices from Julian Jessop, chief international economist at Capital Economics. The rise has little to do with the weaker dollar and everything to do with expectations of global economic recovery, he says.

The broad-based revival in commodity prices since March clearly reflects a combination of factors. One of these is the pure accounting effect of the depreciation of the dollar. Other things being equal, a fall in the U.S. currency will of course put upward pressure on commodity prices when measured in dollar terms - commodity producers with bills to pay in other currencies such as euros and pounds will require a higher price in dollars, while consumers outside the dollar bloc will be more able to pay that higher price. However, the movements in currencies have generally been small compared to the underlying movements in commodity prices.

Looking closely at the relative performance of different commodities, Jessop reckons the rally has primarily been led by oil and industrial metals, which are the most sensitive to the economic cycle. Inflation-driven commodities such as precious metals, including gold, have underperformed in the rally, he says.

Jessop takes all this to mean that higher commodity prices are just another manifestation of the growth in confidence about the global economic outlook. However, echoing investors who increasingly want to see concrete evidence, he warns that the anticipated pick-up in growth-based demand has yet to actually materialise.

Is it all just an illusion, then? Wishful thinking that allows for a rebuilding of depleted stocks?

One of the most significant comments about the world economy this week may have come from Klaus Kleinfeld, the chief executive officier and president of Alcoa, America’s largest aluminium producer. Amid the reporting of  pretty horrible earnings  — a $497 million net loss versus a year-earlier gain of $303 million — Kleinfeld said things may not get much worse.

“There are some signs in many of our end industries for a bottoming out,” he said.

A key element was that inventories have been drained across the board, throughout Alcoa’s supply chain, among its customers and among its customers’ customers.  They are unsustainably low, Kleinfeld said.

That is the kind of thing to lift the spirits of anyone seeking signs of future demand in the economy. Not only is it rare these days for an industrial company’s CEO to find anything positive to say, it also implies that  industrial production is primed for a lift.

Unless, of course, it means that everything is about to come to a grinding halt