Sorry for the lack of posts. I haven’t been feeling well. But let me make a short appearance with some brief thoughts on the global economy.
1 – Brexit
I have been distracted a lot by the Brexit drama unfolding in the UK. In general, I think economics leads politics rather than vice versa. But, this is one instance that could be an exception, particularly if the UK leaves the EU without a deal. I think neither the EU nor the UK are prepared for that eventuality. So, it’s bound to have some economic impact – what kind, I don’t know.
My base case up until now had been an extension of Article 50, or in extremis a revocation. But, we have already seen Article 50 extended. So that scenario has already played out. And I’ve been mum on what I think comes next, largely because I don’t know anymore than you do.
But, the FT’s Whitehall correspondent just wrote on Twitter that Prime Minister May would opt for no deal rather than revoking Article 50. And so, there is a lot of uncertainty as to what will happen. Twice parliament has voted down every proposal pt up for indicative voting. In the last go, it was the Tories who voted down every single option. Labour voted in favour of every option. So, as much as both parties are split on Brexit, the Conservatives are the party that matters here because they simply don’t know what they want. They know what they don’t want, but Theresa May has been unable to get the party to coalesce around anything.
My view: This was always going to be a shitshow. As I documented in October, the UK’s relationship with the EU has always been fraught. A referendum would never solve that issue. And it was stupid to have called one. Cameron did so for purely political reasons, focused as he was on the incessant intra-party fights on the issue. But, we are here now. All I know is that, if Theresa May takes the UK out of the EU in the current chaotic situation, there will be hell to pay politically. The sensible option is to delay for a much longer time, or revoke Article 50 altogether if that’s not possible. The UK needs a serious rethink of what it actually wants.
2- Global Growth
I have been making three cases regarding the economy.
First, bond markets and equity markets are saying two different things right now. Equity markets are rebounding and pointing to continued growth. Bond markets have also been rallying. But that is pointing to caution about the durability of the expansion, with yield inversion almost warning of outright recession.
To me, the fact that we are getting different signals owes to the data, which are inconclusive. And that’s the second point here. We are at a crossroads. We could be in just another global growth slowdown. Or we could be in the beginning of the end of this credit and business cycle. There are signs that the economy is re-accelerating. Commodity and oil prices have stabilized, shipping indices show increased trade flows, and, in the US, at least, negative data signals from the employment market have stabilized.
And so, the fact that the data are still inconclusive points me toward the credit markets. My expectation has been that credit markets would lead and slowing growth would follow. But, it’s been quite the opposite. There are no chinks in the armour for credit. Spreads have narrowed and defaults remain low, despite the recession signal an inverted curve has sent. For me, this is very positive regarding near-term growth.
That brings me to the third point: inversion is not a predictor of immediate recession. It is a signpost that overly tight monetary policy – which acts with a lag – threatens to cause a recession. There are two things two unpack in that statement. The first is that inversion is presaging something that happens 18-24 months later. For example, the curve inverted early in 2006 and we didn’t get a recession until almost two years later, in December 2007. So that necessarily means the Fed can change course and essentially prevent recession from taking hold. The inversion isn’t predicting, it’s warning.
I think that’s all I want to say this morning. The overall message is that there are no real catalysts for a precipitous growth meltdown and crisis that I can see on the horizon. Brexit is the closest I can see to it. And even there, in a worst case scenario where a no-deal Brexit causes chaos, I don’t know if that can create a recession that reaches American and Chinese shores. It will certainly be bad for the EU and the UK. But, I don’t think it’s enough of a shock to take down the global economy.
So, irrespective of whether the global economy re-accelerates, recession is not on the horizon yet. The warning signs are there though. And they must be heeded.