From growth pause to recession
Tuesday 19 December 1995
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.
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