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
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: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch
Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

Dame Harriet Walter interview

The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
Art should not be a slave to the ideas driving it

Art should not be a slave to the ideas driving it

Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
Bill Granger recipes: Our chef's winter salads will make you feel energised through February

Bill Granger's winter salads

Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
England vs Wales: Cool head George Ford ready to put out dragon fire

George Ford: Cool head ready to put out dragon fire

No 10’s calmness under pressure will be key for England in Cardiff
Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

Michael Calvin's Last Word

Time for Old Firm to put aside bigotry and forge new links