Weak global economic data signal likelihood of global recession
The economic data today from a number of different corners has been poor. In Asia, Europe and the US, manufacturing data point to continued slowdown. In the US, weak jobs numbers do as well. It has been clear for some time that growth was decelerating globally. However, at this juncture, the slowdown has accelerated to where I am forced to warn of the likelihood of global recession.
We have been here before. When the United States slowed in 2007 due to the collapse of the subprime housing market, the impact widened to the entire US housing market, which had overheated. The US economy decelerated at an alarming rate and eventually entered recession at the end of 2007. But the problems in the US reverberated globally with many parts of Europe experiencing similar housing busts and emerging markets slowing due to poor export growth. The dynamic now is very similar except it is a debt deflation in the euro zone periphery at the core of the global growth slowdown.
Here are a few data points from the latest economic numbers today. (note PMI readings below 50 represent contraction in manufacturing output):
- US Manufacturing: The ISM said index of factory activity slipped to 53.5 from 54.8 in April. Expectations were for 53.9.
- US jobs: US non-farm payrolls rose by a meagre 69,000 as the unemployment rate rose to 8.2%. Expectations were for 150,000 versus 115,000 prior.
- Asian Manufacturing: Mostly down – China fell to 48.4. Taiwan PMI fell to 50.5. South Korea PMI fell to 51.0. India fell to 54.8. Indonesia fell to 48.1.
- European manufacturing: Eurozone PMI 45.1 (down from 45.9). Spain PMI 42.0 (down from 43.5). Italy 44.8 (up from 43.8). France 44.7 (down from 46.9). Germany 45.2 (down from 46.2). Greece PMI 43.1 (up from 40.7). Ireland PMI 51.2 (up from 50.1)
- European jobs: 11% unemployment in April and March (highest since data series started in 1995). March revised higher to 11% from 10.9%. Greece at 21.7%. Spain at 24.3%.
If you combine this information with earlier releases we have from the euro zone, the US, and the BRICs, it all points to a synchronised growth slowdown that has Europe in recession already and output heading there in the US. US Q1 2012 GDP was revised down to 1.9%. I expect the numbers for Q2 to be weaker still, putting the US also at stall speed.
Put simply: without considerable countervailing stimulus to offset weakening private demand, the global economy is now headed into a recession.
I don’t believe we will see countervailing stimulus until well after the weakness has become pronounced. And so I believe we are likely at the cusp of a global recession. Moreover, given the systemic fragility in Europe and in the US, this recession is likely to be severe.
The macro play here is to favor sovereign debt in countries like the US, the UK, Sweden, Australia, Canada, Norway, and New Zealand that can act as a safe haven and can print currency. Risk assets like corporate bonds, high yield bonds and shares will be hit hard by a global recession as they were in 2007-2008. Banks, in particular, will suffer.
I believe the initial policy response after the decline has begun to set in will be more on the lines of printing money, acting as lender of last resort, and instituting capital controls more than any sort of wholesale stimulus. Only if and when things deteriorate more will we see fiscal policy back on the table throughout the global economy.
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