First with Financial Comment from Arabia

W-shaped global recession in 2010 look inevitable

with one comment

Listening to several of the region’s top economists over the last few days has convinced ArabianMoney that a W-shaped global recession is absolutely inevitable.

No economist allied to a major bank or government can say any such thing, of course. The financial sector so much wants a quick recovery it is not likely to sanction any official comment outside of a U or V-shaped recovery. Ditto governments local and global.

Historical precedent

However, if you look back at the past three recessions the precedent is clear. The mild recessions of 1990 and 2000 saw slow recoveries, while the 1980-82 deep recession saw a double-dip in output before a sharp recovery, albeit from a low base.

In view of the fact that 2009 is a very rare year in which the whole global economy has contracted, and exports and industrial output have suffered their worst declines since the 1930s and arguably worse, then it seems fair to characterize this as a deep recession.

The 1980-2 pattern ought therefore to hold true with a further downturn in the second half of 2010. What possible forces could drive a quick recovery? For the US this would be the 2008-10 recession, unless we are seeing something more in common with the Great Depression of the 1930s.

In that case the second leg of the economic downturn would be sharper than in 1980-82 and it would take even longer before recovery set in. This would be my worst-case scenario. The main-case scenario is the W-shaped recession.

New stock market lows

From a stock market perspective this would mean an early end to the record rally since March and a plunge to new lows, followed by another rally and then perhaps a final collapse to a point 70-80 per cent below previous highs. That would be the 1929-33 pattern, and the final squeeze of that scenario might be averted by interventions.

Only the worst-case scenario from Societe Generale comes close – and naturally it is buried with several other scenarios so as not to frighten the bank’s customers too much. Yet something closer to this than a new bull market is surely only realistic in the circumstances.

In the US the third quarter recovery in GDP has just been revised down by a fifth to 2.8 per cent with all of that growth coming from the stimulus package and measures such as paying people to buy new cars. Consumer demand is still weak and any house price recovery shallow with further pressure to come from mortgage resetting (see graph).

China crisis

Meanwhile, the strength of China is surely being greatly exaggerated, and the weakness of neighboring Japan is closer to the mark as a pointer to the future. Perhaps a weaker dollar has helped China revive its export machine but it is still spluttering and the inflationary impact of an emergency stimulus equivalent to half of GDP in the first-half of 2009 is clear on stocks and property.

This is a liquidity bubble that could sink the new Asian tiger economy with enormous consequences for financial markets and commodity prices. It is impossible not to see the fast recovery of the financial sector from near death in March as anything other than an illusion of smoke and mirror accounting that will shatter sometime soon. The S&P report on the banking sector said as much yesterday.

China and the financial markets are the Achilles heel to watch for the crisis that provides the second leg of this W-shaped recession. We are not out of the woods just yet.


Written by Peter Cooper

November 25, 2009 at 9:16 am

One Response

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  1. You may be correct, Peter, but I believe that the Fed plan is to stimulate with as much money printing as necessary in order to prevent a double dip during the coming mid-term US elections. They believe that they have no choice right now, but to ignore the threat of future inflation. ‘Long term’ for politicians is the next election. After all, what planning have governments done for peak oil, an event which certainly must occur.
    Congress might start many ‘cash for’ programs. You can easily increase economic activity by giving away enough free money! If unemployment stays very high, the free cash will not immediately cause inflation. I can hear them saying, “We’ll worry about that later. Don’t create problems that don’t yet exist.”
    I can’t see how Mr. Faber is not correct, in saying that the US government will keep up the money printing in an effort to avoid a depression until, eventually, they cause a hyperinflationary collapse. If I had to guess, I would say that it will take at least another five years or so, before they lose control and chaos ensues. Yet, they could cut spending and raise taxes, causing a long severe recession, but saving the dollar. I see little chance of that, but it is possible.
    One good thing, the doom prophets are motivating me to save energy by slowly increasing the fiberglass insulation in my attic, in case the electricity goes out during the coming apocalypse. Last winter it got down to -6 degrees C here. Global warming, no doubt.

    Ed Note: Bill there is a world outside the USA, see my comments today on the $59 billion debt default in Dubai.

    Bill Simpson in Slidell

    November 26, 2009 at 8:47 am

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