From growth pause to recession

ECONOMIC VIEW

The markets yesterday were glum about the US budget paralysis, but maybe they should have been glum about something else. One of the best questions to ask if you want to peer ahead into the economic future is always: what is the surprise? What is the thing which we ought to have spotted at least as a possibility, but which hardly anyone has yet noticed?

I have a candidate. It is that the pause in US growth which is clearly taking place at the moment might turn into something worse, maybe even a recession.

To explain. Look around the world and there are clear signs almost everywhere of slowing growth. Only yesterday the German government warned of slower growth there. Last week Kenneth Clarke acknowledged that UK growth this year would be below the figure in the budget forecast a couple of weeks earlier. Japan continues without any real recovery at all. And while growth in France has been creeping upwards, latest estimates are being downgraded again.

But there is a big difference between slower growth, even the very slow growth dubbed in the US as a "growth recession", and none at all. For most people, that is not yet on the screen. If, however, there is to be another world-wide recession - and some day there will inevitably be one - then the most likely place for it to start would be the US, simply because the US is furthest along the cyclical path. It has had the longest period of expansion, having been growing steadily for about five years.

What triggered my own awareness of the danger of recession was a paper by Lacy Hunt, the chief US economist at HSBC Markets. The HSBC thesis is that the various measures of economic activity have all been falling on a year-on-year basis for upwards of 12 months. They are not yet negative and may not become so. But this sort of downgrading has in the past been followed either by a growth recession or by full-blown recession.

The baseline prediction is for the growth recession, but this depends on the Federal Reserve continuing to ease monetary policy. HSBC have factored in a full percentage point in interest rates during the course of the next year. The risk of a full recession as severe as that of 1990/91 is put at 35 per cent.

That would be higher than almost all other US forecasters;the mainline view is very much that while there will be slower growth, maybe less than 2 per cent, there is little danger of a worse outcome than that.

When you get a view on the extreme end of the range you look for corroborating evidence. It has to be anecdotal because by the time the figures are published the view has become mainstream. There is some. For example, when the bank's team has been visiting US clients in the last few days, they find that their own perception of a marked slowdown is echoed by the senior executives to whom they are making their presentation.

The key question, though, is not so much how marked the slowdown in the next six months, but rather the capacity of the US economy to stage a rebound in the second half of next year. What might support such a rebound? It won't be public spending, for there are tax rises in the pipeline and the budget impasse, however it is resolved, will surely lead to greater tightening of fiscal policy. Meanwhile the budget problem remains unresolved, which may delay any interest rate cuts the Fed would like to bring in.

If not public spending, what about exports? On a ten year view US export performance has been impressive, but the export sector is still too small to make a make a material impact on the growth of the economy as a whole, even if the two main US markets, Canada and Mexico, were performing strongly, which they are not.

No, it will, as usual in the US, be up to the consumer to pull the economy along, and here the Fed's actions will be crucial. Consumers have to be prepared to carry on piling up debt, and the Fed has to cut rates to reduce the burden of the debt they have already accumulated. If it does not do so, or if (in the absence of a budget deal) rates were to rise, recession would be virtually guaranteed.

Conclusion? It is always useful to have the extreme view set out in a logical manner, if only because that gives one a point of reference from which to disagree. Up to now most of us here in Britain have been much more worried about the dangers of a slowdown across Continental Europe than of one in the US. As a working assumption we should at least not take the US economy for granted, and be aware that the danger of a new world recession starting there is at least as great as one starting in Europe.

I do not think at this stage there is enough evidence to go much beyond that. Slow growth, between 1 and 2 per cent, is more likely than no growth. But no-one should expect the US to give much help to the world economy during the next few months. It is no longer the locomotive. Finally, in so far as the recent heady performance of the US stock market depends on reasonable continued growth in the economy, expect at best a pause there too.

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
Arts and Entertainment
TV
Voices
The Palace of Westminster is falling down, according to John Bercow
voices..says Matthew Norman
Sport
Steve Bruce and Gus Poyet clash
football
News
Graham Norton said Irish broadcaster RTE’s decision to settle was ‘moronic’
TV
Arts and Entertainment
Jake and Dinos Chapman were motivated by revenge to make 'Bring me the Head of Franco Toselli! '
arts + ents Shapero Modern Gallery to show explicit Chapman Brothers film
Arts and Entertainment
Kurt Cobain performing for 'MTV Unplugged' in New York, shortly before his death
music Brett Morgen's 'Cobain: Montage of Heck' debunks many of the myths
ebooks
ebooksA special investigation by Andy McSmith
Life and Style
life
Sport
Brendan Rodgers
football The Liverpool manager will be the first option after Pep Guardiola
News
Amazon misled consumers about subscription fees, the ASA has ruled
news
Arts and Entertainment
Myanna Buring, Julian Rhind-Tutt and Russell Tovey in 'Banished'
TV Jimmy McGovern tackles 18th-century crime and punishment
Arts and Entertainment
Paul Whitehouse as Herbert
arts + ents
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.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Austen Lloyd: Law Costs HOD - Southampton

£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

SThree: Recruitment Resourcer

£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn