It Started In America

01/02/2013 at 10:10 am

This was a phrase very commonly heard in relation to the financial crisis. From a number of perspectives it had merit: various key elements of the disaster were explicitly transatlantic (the sub-prime mortgage market) and several had distinctly American roots (rating agencies, structured credit products). Of course we shouldn’t lay all the blame at America’s door. Nonetheless, from fraudulent originators through hedge funds to investment banks and beyond, the detonators which set off the global explosion were made in the USA.

The release of the advance estimate of Q4 GDP data for the US this week reminded us that this huge economy, which remains the behemoth of the financial world, has lost none of its power to shock. Of the more than seventy economists tracked by Bloomberg, none expected output to fall. The consensus was for a 1.1% (annualised) rise. Since the data came out, reaction has been muted. Stocks have drifted lower. The dollar is a little weaker. But observers in America and around the world are broadly united in their dismissal of the release as a temporary blip.

They might well be right, but this was hardly the attitude taken when US GDP last disappointed back in the summer of 2011. Sentiment was more fragile, to be sure. The Greek crisis was weighing rather more heavily on the market then than it is today. And of course there were down-to-the-wire budget negotiations in Washington that tantalised with the prospect of an American sovereign default, prompting S&P to downgrade the country’s credit rating all the way from AAA to AA+.

But it was the revisions to growth that triggered the pandemonium. The S&P 500 had already fallen by 8% when the downgrade came. And the talk that followed was all about double dips and engines failing. With Europe in crisis, the US had been the great hope. One methodological change to statistics on imported petroleum later and that hope was swiftly and very sharply abandoned.

The situation today is therefore eerily familiar. The European crisis is forgotten, but not gone. Hopes for growth in the US are riding high again, and the S&P is some 17% above its June low. At the same time, growth has disappointed and budget negotiations are ongoing in Washington …

This is not to suggest, and still less to hope that there will be another shock of the 2011 magnitude. As yet the possibility of real slowdown in the US looks remote. This year we should see an acceleration in global growth and could see greater normalisation of pricing within and between asset classes. That’s the kind of thing we surely want to see starting in America.


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