Recession predictions? Better late than never
The chances of a second U.S. recession are rising. But just how high a probability is always difficult to gauge. The latest Reuters consensus from private sector economists – most employed by an industry that got us into the mess – is currently one in four. That’s not very high, but it has crept up from one-in-five when we asked the same people two weeks ago.
In the meantime, the U.S. has done what many would never have thought possible – it lost its AAA sovereign debt rating from Standard & Poor’s, thanks to an acrimonious political debate over the debt ceiling and, in S&P’s judgment, inadequate legislation to tackle deficits over the long-term. Global stock markets have plummeted 20 percent since May, racking up staggering losses over the past few days, rattled by that U.S. rating downgrade, worries about a world economic slowdown, and a spiralling euro zone debt crisis that now is lapping at the shores of a G7 country — Italy.
The fact it’s been too long since the Great Recession technically ended to call any new recession a “double-dip” shows just how dire the situation is. Nouriel Roubini, known to most as “Dr Doom” for talking down the U.S. economy through bubble years but getting the call right on the last recession, is one of the few who have already called the next one.
Kenneth Rogoff, professor of economics at Harvard University, takes it a step further. Whether or not advanced economies have slipped back into recession, he says, is a moot point given that two years into recovery, none of them have yet to achieve the pre-recession peak in gross domestic product.
That may be true, but consensus forecasts on whether or not we’re headed back into the abyss still tell us something.
- Last year, when hopes of a U.S. economic recovery were taking hold, economists as a group gave a mere 15 percent chance of a recession in the next 12 months. They were right.
- Now, with mostly dismal U.S. data coming in on a daily basis, from growth to confidence to consumer spending, economists see only a 25 percent chance of a recession.
- None of the 42 economists who answered the question in the latest poll saw a probability of greater than 50 percent. Nowhere in the forecast horizon do economists see any quarterly contraction.
We now know when the U.S. economy last ran into real trouble, it contracted in Q1 2008. J.P. Morgan bought troubled U.S. investment bank Bear Stearns in March. Six months later, Lehman Brothers went under, leading to a credit crisis that sent the U.S. economy into its worst recession since the Great Depression.
How uncertain exactly is the uncertain BoE?
For a central bank that looks certain to bust its 2 percent inflation target for most of the time between now and the London 2012 Olympics, there is still a lot of uncertainty out there.
Bank of England Governor Mervyn King referred to “uncertain” or “uncertainty” about the outlook five times at the May quarterly Inflation Report press conference according to the bank’s transcript, and the latest one didn’t seem much more confident in tone.
“There is great uncertainty about the outlook for both the United States and our most important trading partner, the euro area,” King said in his opening remarks before taking questions from reporters.
Later on, he proclaimed that the recovery period “will take several years before we adjust back to anything we can call remotely normal.”
But just how uncertain is the BoE?
George Buckley, chief UK economist at Deutsche Bank, has come up with a revealing graph measuring the width of the BoE’s “fan charts”, which identify the distribution of probable outcomes in their quarterly GDP forecast, against the market’s main volatility measure, the VIX. They appear to track each other rather closely.
The spread on the fan chart between the weakest probable path for GDP growth and the strongest blew out to 7.5 percentage points in early 2009 from just over 2.5 percentage points before the financial crisis set in three years ago.
No split up for euro zone in near-term at least
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The euro zone sovereign debt crisis has not made a near-term collapse of the bloc any more likely, a survey on hihifrds.com, a website devoted to the Thomson Reuters FX and money markets trading community, suggests.
The survey asked whether all 16 countries currently using the euro would still be doing so by the end of 2012. Fully 88 percent of respondents said they would.
Maybe the 16 euro zone members are tied to the single currency for now but others have more choice. Russian President Dmitry Medvedev and his Brazilian counterpart Luiz Inacio Lula da Silva have agreed to consider how to make more use of their own currencies in bilateral trade, rather than the euro or dollar.
“Neither the dollar nor the euro, nor any other currency, can claim to be a universal currency that protects all states,” Medvedev said.
‘Ken Clarke for Chancellor’ is no joke
Ken Clarke shouldn’t underestimate how strongly the city economists polled by Reuters last week want to see him serve as Britain’s finance minister next term.
The Conservative shadow business secretary and one time ex-Chancellor gleaned a few laughs from Thursday’s BBC Question Time audience when asked about the poll, saying: “There’s a limit to how much of a glutton for punishment you’re going to be.”
But economists would dearly like to see the 69-year-old’s appetite for punishment return soon. No-one came close in the Reuters poll to touching Clarke for popularity. Some 16 out of 29 economists picked him as their first choice for Chancellor.
This was more than twice the number of economists who want to install second-placed Vince Cable, the experienced Liberal Democrat treasury spokesman whose quick wit has made him a public favourite.
For Clarke to serve, Conservative leader David Cameron would first have to dump the party’s likely choice for finance minister George Osborne – a decision that would mean Cameron had gone “slightly off the rails”, according to Clarke.
On Question Time, Clarke was loyal and wholesome in his support for Osborne, who fared poorly in the Reuters poll. He finished fourth from the five choices on offer and behind the current Labour incumbent, Alistair Darling.
Household spending cutbacks: What’s the first to go?
An Ipsos/Reuters poll of 23 countries found that cuts in household spending have remained constant during the past six months with entertainment, vacations and luxury items the first to go for nearly three quarters of families, followed by clothing, energy consumption and gasoline/driving.
The 23 countries polled, including the United States, Canada, Brazil, Germany, Britain, Sweden, China and Japan, make up 75 percent of the world’s gross domestic product.
Where are you cutting back on spending?
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