From boom to bust?

Recessions inevitably follow booms, are we living on borrowed time?

If you asked an economist where the Dow will be in a year, you'd probably get a number between 5,000 and 15,000. Some card-carrying economists even assert that the Dow's true home should be 35,000. Reliant on different analytical tools, economists vary widely in their predilections, as well as their predictions.

If you asked an economist where the Dow will be in a year, you'd probably get a number between 5,000 and 15,000. Some card-carrying economists even assert that the Dow's true home should be 35,000. Reliant on different analytical tools, economists vary widely in their predilections, as well as their predictions.

Unfortunately, we can't know in advance who these clever or lucky individuals are, and consequently, we can't base our investment decisions on their analyses and predictions.

Economics is not an exact science. In addition, even if the economic apple cart were smooth, there's plenty of uncertainty to upset it. Wars, rogue traders and other wayward unquantifiable forces tend to occur with unsettling frequency and spoil the forecasts.

Instead of indulging in the mug's game of Dow predicting, it might be more informative and profitable to ponder the next recession, whether global or restricted to the UK. One will surely be coming along. We just don't know when it will arrive, how long it will stick around, and how bad its bite will be.

"After this long expansion, you would normally expect the US economy to turn down," says Schroders chief economist Keith Wade. "That is why people are saying that this can't go on, and some even predict a recession."

For most British economists, questions about the home economy lead to thoughts of abroad: "The UK has benefited from expansion in the US," Wade notes, "and if the American stock market fell back, it would have a knock-on effect everywhere. About 12 per cent of UK exports go to the US, so there is a direct impact there. A large part of overseas earnings from the UK, perhaps a quarter, come from their subsidiaries in the US. A slowdown or recession in the US would have a knock-on effect on UK company earnings."

But perish memories of the deep and painful recession of a decade ago. The next one "probably won't be as severe", Wade believes. "Ten years ago the economy was very overheated, inflation had risen, interest rates had to go upsharply and the bubble in the UK housing market had to unwind."

Different economic factors are now operative, which will impact most on different sectors of the economy. "The UK recession of the early 90s was very much a domestic-driven downturn. A recession now would be more global in origin and would obviously hit the trading rather than the domestic sector, and manufacturers, exporters, people like that would be the most affected," says Wade. "While the US economy is showing signs of a bubble, many changes in its economy have been positive."

Jeremy Batstone, chief economist of NatWest Stockbrokers, concurs that "when America sneezes, the rest of the world catches cold. Look at UK and European technology stocks. They are very close watchers of Nasdaq, and when Nasdaq has a good day, our technology stocks have a great day".

Like Wade, Batstone is mostly unruffled at present: "The very worst - case scenario is a deep recession caused by a very sharp hike in short-term interest rates to stop high octane growth. Recession and inflation would happen at the same time 'stagflation'. It's harder to see this occurring in the UK, but it's quite easy to see in the US, with its twin deficit." Still, he rates this probability at only 10 per cent.

Much of his optimism is based on the continuous success of one person, and this is both good and bad news. "I don't foresee a recession in the near future if you mean the next three to four years. Growth expectations are continuing to rise. Our central projection is that Alan Greenspan will engineer a soft economic landing. He can achieve the slowdown because the global financial system believes in his ability."

It is not all smooth sailing: "There is little sign that, globally, growth expectations are being revised down, or even showing any sign of peaking out. But if economic activity doesn't slow, the authorities are going to have to tighten short interest rates in order to create the soft landing," says Batstone.

Here, too, nothing's precise: "Because monetary policy is such a blunt instrument, you could very easily overtighten short term interest rates, and that, has been what has happened in response to a strong growth and inflation surge. Short interest rates have had to be raised aggressively and that has been the end of the cycle. We've moved back into a hard landing and recession."

Mr Greenspan notwithstanding,"some sort of exogenous shock could come along and derail everything," Batstone notes. "Were Mr Greenspan to be run over by a bus or anything happen to him, I think it would cause a very severe tremor to go through the financial markets," says Batstone, whose greatest gloom seems to be reserved for his sense of Greenspan's successor. "If you look back at the financial record of past Fed' chairmen, they haven't had anything like the same kind of success that Mr Greenspan has had. And he's not in his first youth, of course."

We can only hope, then, that Mr Greenspan has the good sense to looking both ways before crossing the road.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
Food blogger and Guardian writer Jack Monroe with her young son
people
News
people
News
peopleSinger tells The Independent what life is like in rehab in an exclusive video interview
Arts and Entertainment
booksPhotographer Richard Young has been snapping celebrities at play for 40 years - but he says it wasn’t all fun and games...
PROMOTED VIDEO
News
i100
Sport
Aguero - who single-handedly has kept City's Champions League dreams alive - celebrates his dramatic late winner
footballManchester City 3 Bayern Munich 2: Argentine's late hat-rick sees home side snatch vital victory
News
Muhammad Ali pictured in better health in 2006
peopleBut he has enjoyed publicity from his alleged near-death experience
Arts and Entertainment
Tony breaks into Ian Garrett's yacht and makes a shocking discovery
TVReview: Revelations continue to make this drama a tough watch
News
news
Arts and Entertainment
TV
News
The assumption that women are not as competent in leadership positions as men are leads to increased stress in the workplace
science... and it's down to gender stereotypes
Life and Style
The racy marketing to entice consumers to buy Fairlife, which launches in the US next month
food + drink
Arts and Entertainment
Inner sanctum: Tove Jansson and friends in her studio in 1992
booksWhat was the inspiration for Finland's most famous family?
News
i100
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Citifocus Ltd: Product Development - Asset Management

    £Attractive: Citifocus Ltd: High calibre individual with significant product d...

    Citifocus Ltd: Credit Ratings - Banking Sector

    £Negotiable: Citifocus Ltd: Leading global bank seeks experienced credit analy...

    Citifocus Ltd: Economic Crime Investigation & Analysis

    £Attractive Package: Citifocus Ltd: High calibre individual with a high degree...

    Citifocus Ltd: Snr Risk Analyst - Capital & Liquidity

    £Attractive: Citifocus Ltd: High calibre individual with superior academics an...

    Day In a Page

    Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

    Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

    Our partner charities help veterans on the brink – and get them back on their feet
    Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

    Putin’s far-right ambition

    Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
    Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

    Escape to Moominland

    What was the inspiration for Finland's most famous family?
    Nightclubbing with Richard Young: The story behind his latest book of celebrity photographs

    24-Hour party person

    Photographer Richard Young has been snapping celebrities at play for 40 years. As his latest book is released, he reveals that it wasn’t all fun and games
    Michelle Obama's school dinners: America’s children have a message for the First Lady

    A taste for rebellion

    US children have started an online protest against Michelle Obama’s drive for healthy school meals by posting photos of their lunches
    Colouring books for adults: How the French are going crazy for Crayolas

    Colouring books for adults

    How the French are going crazy for Crayolas
    Jack Thorne's play 'Hope': What would you do as a local politician faced with an impossible choice of cuts?

    What would you do as a local politician faced with an impossible choice of cuts?

    Playwright Jack Thorne's latest work 'Hope' poses the question to audiences
    Ed Harcourt on Romeo Beckham and life as a court composer at Burberry

    Call me Ed Mozart

    Paloma Faith, Lana del Ray... Romeo Beckham. Ed Harcourt has proved that he can write for them all. But it took a personal crisis to turn him from indie star to writer-for-hire
    10 best stocking fillers for foodies

    Festive treats: 10 best stocking fillers for foodies

    From boozy milk to wasabi, give the food-lover in your life some extra-special, unusual treats to wake up to on Christmas morning
    Phil Hughes head injury: He had one weakness – it has come back to haunt him

    Phil Hughes had one weakness – it has come back to haunt him

    Prolific opener had world at his feet until Harmison and Flintoff bounced him
    'I have an age of attraction that starts as low as four': How do you deal with a paedophile who has never committed a crime?

    'I am a paedophile'

    Is our approach to sex offenders helping to create more victims?
    How bad do you have to be to lose a Home Office contract?

    How bad do you have to be to lose a Home Office contract?

    Serco given Yarl’s Wood immigration contract despite ‘vast failings’
    Green Party on the march in Bristol: From a lost deposit to victory

    From a lost deposit to victory

    Green Party on the march in Bristol
    Putting the grot right into Santa's grotto

    Winter blunderlands

    Putting the grot into grotto
    'It just came to us, why not do it naked?' London's first nude free runner captured in breathtaking images across capital

    'It just came to us, why not do it naked?'

    London's first nude free runner captured in breathtaking images across capital