Concerning Growth

05/02/2016 at 4:42 pm

The bells of doom continue to toll, with headlines appearing in recent days about the forthcoming global recession (e.g. yesterday’s news wires, business TV channels, the financial press, etc.) Now it is true that the MSCI World Index of developed-market stocks has just suffered its biggest monthly fall since all the way back in the distant past of August 2015. But does this really augur a global recession, similar to the Great Recession of 2008-9?

In times of crisis this blog believes that it behoves us to seek refuge in facts.

Let’s start with Europe. Yesterday’s EU Commission forecast carried a lower estimate of economic growth for the eurozone this year than it did at the time of the autumn forecast last November, it’s true, and this has been taken in some quarters as support for the bear case. But the revision is negligible: down from +1.8% to +1.7%. It still represents an increase on 2015, not a diminution. And in absolute terms these kinds of numbers are breakneck for the poor old euro area, where growth has averaged a meagre +1.3% real over the whole period of the single currency’s existence and a paltry +0.7% over the last ten years, marred as they were by the double dip recession. Logic, too, is not on the side of the bears here: Europe as a whole is the single biggest importer of crude oil by some distance. So while Norway and Scotland are not enjoying crude prices of $30 per barrel, last year’s figures for the eurozone economy bear out the massive positive effect they have had on the continent more broadly. The forecast numbers for this year do the same.

Crossing the Atlantic, the picture in the US and Canada is more mixed. With its oil economy hit hard Canada’s GDP growth has fallen away to zero in recent months, and is predicted to come in at 1.2% for 2015 overall – less than half the growth rate of the previous year. Last week’s US print for Q4, up only 0.7% on an annualized basis, was weak but roughly as expected: markets had been bracing themselves for the effects of the strong dollar on growth. Though even then it is worth noting that the greenback has plunged somewhat over recent days amid all the disappointment. And for the current calendar year the consensus is for growth of 2.4% – a little below trend, perhaps, but not, in any way, shape, or form, a recession.

Another ocean away, Japan only just emerged from a real life recession back in 2014. The consensus GDP forecast for 2016 is +1.0%, and with consumer and business confidence strengthening into the end of last year there is no sign that this represents unreasonable optimism. With the long run in mind one might observe that growth of 1% per year is not desperately exciting, that this is connected to the country’s demography and that there are lessons for many other economies on this front soon similarly to be learned – but that is another, much larger, story.

Hopping across the seas around China and her neighbours – minding our step over those disputed archipelagoes on the way – emerging Asia is not very convincing as a recessionary prospect either. Only this week the Chinese government published a revised growth target of 6.5-7%: this is below the double-digit rates of expansion to which we became accustomed prior to the Great Recession but not exactly sluggish, and quite some distance from an economic contraction. South Korean growth is forecast to tail off a bit this year, true – all the way down to +2.9% from +3.0% last year. Growth in Malaysia too is expected to come off the boil, reaching a mere +4.5% this year. Still it is not all bad news for the Asian economies: growth rates are actually expected to increase this year in India, Indonesia, the Philippines, Thailand and Taiwan.

Lest we allow ourselves to be lulled into a false sense of security, there are countries where growth prospects remain quite bleak. Mineral economies for instance, such as those of Brazil, Russia and Venezuela, are forecast to contract again this year, albeit at less alarming rates than in 2015. These are the areas where cheap oil tends to be a net economic negative. Elsewhere, however – for most of the world – it is a net positive. (The figures on this subject are readily available if any “oilmageddon” bears reading this piece care to look at them.)

Finally, the idea that we are going to be driven into a recession by the stock market’s late gurgitations is the height of self-regarding ludicrousness. Just think: back in the 1990s, NASDAQ were putting adverts on in the middle of News At Ten, Cisco Systems was worth about as much as Belgium and day trading was the easy route to fulfilling the American dream. Then everything collapsed in 2000. And the effect on the US economy? Real GDP growth in the fourth quarter of 2001 fell to +0.2% on the year. That is as bad as things got. There was never any recession.

Equally it is almost impossible to make a reasoned, cold case for a global recession this year. Predictions to the contrary are not without their use though. They tell us something about sentiment, and suggest – perhaps quite strongly so – that the current dislocation might present the more level-headed investor with a buying opportunity or two.


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