Global Economy: Stalling Recovery27 May, 2011, 3:55. Posted by Zarathustra
Tags: Economy, Global, World
Just as the Air France flight which stalled before crashing to the sea, it looks like the global economic growth is stalling, and we are headed for a slowdown in summer, somewhat similar to what has happened last summer. Or if you are willing to consider a more severe case, the summer of 2008.
The ECRI has already suggested that a global manufacturing slowdown in summer is almost a sure thing, although they are not yet predicting a recession yet, pending for more data. Signs of troubles are showing everywhere.
The second estimate of US GDP disappointed, with the first quarter GDP grew at the annual rate of 1.8% against the hope of an upward revision to 2.2%. The first estimate was also at 1.8%. Initial jobless claims numbers have also been rising, so the job market is probably not improving enough. Also, the second round of quantitative easing will end within weeks.
The debt ceiling nonsense is also important. Or is it? No one in his/her right mind seems to think that the United States may default on its debt. The Republicans, particularly those Tea Party folks, seem to be using that as a tool to force the Democrats into agreeing further spending cuts, while curiously opposing any tax increases for the riches. Cutting spending at such time will be bad for the economy, and the bond market seems to be pricing in this as government bond yields drop to year-to-date low. US Treasury 10 year bond yield now stands below 3.1%, lowest since the start of the year. Curiously though, as pointed out by James Mackintosh at FT, the costs of credit default swap insuring against a US default has been rising bizarrely, and the CDS prices are ranking the probability of US default above Indonesia.
China, of course, is now slowing down. The flash estimate of HSBC China Manufacturing PMI declined to 51.1, confirming the slowdown (it was somewhat expected, though the market reacted very negatively). The biggest worries, in my view, is the real estate bubble. Now even Richard Koo thinks that there will be blood in the real estate sector of China, pretty much for the same set of reasons I have been arguing for quite a while: slower transactions lead to higher inventories and debts level for real estate developers. Although monetary tightening has produce liquidity squeeze in which many companies find it difficult to obtain any credits at all, inflation and home prices remain high, and the government still appears to be determine to bring those down, so one or two more interest rate hikes and a couple more increases in reserve requirement ratio are still pretty likely. A slowdown of the Chinese economy is inevitable, the only question is how significant it is.
Japan, of course, has got back into recession after the devastating earthquake. And recent focus has somewhat been shifted to Europe, where Greece default (or restructuring) is looking increasingly inevitable even though the European Central Bank is extremely reluctant to let that happen, while the ruling party of Spain suffered from losses from local elections as a backlash against austerity. As mentioned before, Niall Ferguson is quite worried about the political processes in Europe which will create more problems than they can solve.
Things are looking in a much worse shape now than late last year. Slowdown is now looking inevitable, but we will need more time and data to see if a downright recession will be a real possibility.