Global Re-Recession

The following is a modified excerpt from:

5 Reasons Why A Global Recession Seems Likely – by Rob Clarfeld, 7 June 2012 (published on Forbes Intelligent Investing App.)

A stronger year-end economy followed by weakening during the following spring and summer months has been the recurring theme 3 years in a row now and lead to rolling debt crises countered with strong central bank policy; essentially pushing out the possibility of a renewed recession for a few more months.

With a recession forestalled, economists proclaim a strong recovery is right around the corner, only to see weakness re-emerge as the impact of the policy stimulus wears off.

This has happened in 2010, 2011, and now it is again occurring in 2012.

How healthy can the global economy really be if it is constantly in need of huge monetary crutches?

Here’s my thinking:

Europe, the world’s largest economic bloc, is already contracting at an accelerating pace – the unemployment rate just hit a record of 11% and the Eurozone PMI measure of manufacturing strength has been contracting for 10 months running, and is getting worse; as geopolitical risks in the Eurozone are climbing and the fragility of the banking system is increasing.

China is slowing and unlikely to be as strong a driver of global growth as it was just a couple years ago and China’s government has made it clear that any additional stimulus would not be anywhere near the size and scope of that of 2009, which seems to have created a mountain of non-performing debt.

India and Brazil, two extremely important emerging powers also are slowing. India is stagnating (-1% annual GDP rate) while Brazil grew at only 0.2% in the first quarter.

The emerging market slowdown will provide far less of a cushion against diminished global growth than it did just a few years ago. So much for decoupling…

The U.S. economy cannot achieve “escape velocity,” to produce a self-sustaining recovery. The job market never left the recession to begin with. Over four years have gone by since 2008, when the U.S. hit its employment peak, and we’re still 3.6% below where we started. This is truly unprecedented as recoveries typically take a little over two years to reclaim a previous employment peak. The latest unemployment report showed an increase in part-time jobs but a loss of full-time employment. According to David Rosenberg, personal disposable income adjusted for taxes and inflation just declined for the 7th month in a row; this rarely happens outside of a recession. For a primarily consumer-based economy, combined with a low aggregate savings rate, this weakness in income growth is alarming.

The half-life on monetary bailouts is getting shorter and shorter and we fully expect to get another dose of monetary stimulus in short order.

However these stimulus measures from global central banks have not produced a self-sustaining recovery because they don’t solve the problem of excessive global indebtedness. They treat symptoms, not the disease.

As a result, the positive impact on the markets and the economy seems to be getting smaller. The much-heralded LTRO (long-term refinancing operation) in Europe put the crisis on ice for a mere 4-5 months, and here we are again, talking about the worsening European debt crisis.

Although few economic forecasters are calling for a recession — they never do, I believe that currently there is at least a very significant possibility that we are at the front-end of another global recession. I hope that this is not the case, but the foundation beneath the global economy is exceedingly fragile.

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