Daily: On the verge of a second global recession in five years

Daily commentary: Global growth

I have been writing about the global growth slowdown for the better part of a year now. At the end of last year, I wrote:

Over the medium-term, despite easy money from the ECB, there are problems and I anticipate these to come to a head for the situation in Greece and for euro zone economic growth. In the medium-term, through 2012, I don’t expect euro zone failure. I do expect a worsening crisis as poor growth takes a toll. Over the longer-term, however, I am less sanguine. The euro cannot work as envisioned by the Germans. It will see at least Greece leave.

The things that I think are actually most relevant over the short to medium term on markets are outside Europe

Those things were the bubbles popping in China and Australia and the associated slowdown along with an Indian slowdown. I think my macro view then still holds:

We are in a second synchronised global growth slowdown. Moreover, the policy response must be more muted this go round as the public sector is more indebted and has less policy space than in 2008 or 2009. Expect policy inaction followed by fits of volatility due to inaction, followed by vigorous policy responses to keep the muddle through from collapsing into Depression. Overall, all of the risk is to the downside, not just in the euro zone but globally.

And the problem here is that there is no one to do any heavy lifting, not China, Brazil, or India, not the United States and certainly not Europe. All around, there is economic weakness and more limited policy space to counteract it. Watch for signs of capital flight out of China because I am seeing more stories on this topic and it bears watching given a prediction by China watcher Victor Shih about this.

Gavyn Davies points to the one silver lining in this and that is oil price weakness, which is a great stabiliser for the global economy. In the past few years when we saw recession as a possibility, oil price drops also were helpful in permitting continued muddle through. I do not believe that this will be enough this time because of the breadth of the slowdown. For example, below are articles on Eastern Europe’s slowdown, on Argentina’s implosion, on Ecuador’s slowing and on further slowing in Europe just as examples of how widespread this slowdown is. The economies with the greatest net addition to world GDP are the only ones that can prevent a second global recession. And at this point in the cycle, especially given the political constraints in Europe and the US, I don’t see anything that will stop the slowdown. The question now is how deep will this recession be and what will be the effects on our housing markets and fragile banking systems. These are the feed through mechanisms that created a problem in 2008 but we also have municipal debt in Europe and the US as potential feedthroughs to watch.

As I gather more data, I will write a synopsis on this topic.

That’s it for now. Here are the links.

Will the oil stabiliser prevent global recession? | Gavyn Davies

Argentina: it’s official, no more dollars! | beyondbrics