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Harvard professor sees 50% chance of recession in the US; growth may slow in Europe and Asia
By NEIL BEHRMANN
05 August 2011
Global equity markets lurched sharply lower yesterday as fears mount that the US and Europe could be hit by a double-dip recession next year, accompanied by a sharp slowdown in Asia and other emerging markets.
Reflecting the general nervousness, New York stocks dived in morning trading yesterday. By noon, the Dow Industrials was down a whopping 3 per cent or about 316 points at 11,579.89. London fared no better, with the FTSE 100 index also shedding about 3 per cent yesterday at 5,393.14 points.
Also unsettling markets was a decision by Spain, already dogged by worries of a default, to cancel a bond auction scheduled for Aug 18. Earlier in the day, though, it had managed to raise 3.3 billion euros (S$5.68 billion), but at a hefty rate.
Harvard University economics professor Martin Feldstein now thinks that there is a 50 per cent chance of recession in the US. But several top economists do not expect a full-blown recession in which the US and other major economies will struggle with negative growth.
‘The US is already in the throes of a growth recession,’ said Brendan Brown, London-based chief economist of Mitsubishi UFJ Securities International. ‘Soaring US, German, French, British, Swiss and Japanese bond prices and weak equities indicate that the malaise is spreading to the global market.’
‘Growth recession’ is the term for a sharp slowdown, but where economic growth - albeit at lower levels - is still positive. Aggravating matters, high-priced energy and commodity prices have kept inflation at uncomfortable levels so that the ‘misery index’ of high unemployment and inflation, notably stagflation, is at uncomfortable levels in major developing nations.
Morgan Stanley forecasts that real growth of the Group of Ten (G-10) developed nations will decline from 2.9 per cent in 2010 to 1.9 per cent in 2011, and will recover slightly to 2.4 per cent in 2012. Inflation this year is projected at 2.7 per cent, up from 1.4 per cent in 2010.
Emerging market growth is expected to fall from 7.8 per cent in 2010 to 6.6 per cent in 2011 and rise marginally to 6.7 per cent in 2012. Asia ex-Japan growth is predicted to slip from 9.4 per cent in 2010 to 7.7 per cent in 2011 and rise slightly to 7.8 per cent in 2012.
To counter an economic slide, the probability of the US Federal Reserve engaging in a QE3 - a third so-called quantitative easing of US Treasury bond buying to lower short, medium and long-term interest rates - is increasing.
QE1 and QE2 have failed to reduce unemployment because of bad investment, notably misallocation of capital. Instead, they have weakened the US dollar and boosted dangerous speculative activity in China and other emerging markets, gold and other commodities and property in Asia and elsewhere, economists say. Markets may rally initially on any announcement but could then fall back as participants may well be sceptical about the success of any third phase, economists believe.
‘QE3, when it comes and in whatever plausible form, will be a damp squib,’ Mr. Brown said.
Meanwhile, gold is trading at record levels, which is hurting the global jewellery industry as investors distrust currencies. The European Central Bank (ECB) has torn up its rule book and is supporting Greece, other stressed sovereign nations and broken banks, while the Bank of Japan (BOJ) has also announced more quantitative easing and dollar support operations to weaken the sky- high yen.
Market participants are worried because recent statistics show that global manufacturing is beginning to fall. From the US to Europe and Asia, purchasing managers reported that manufacturing activity in July grew at the most disturbing rate since nations struggled out of recession in the first quarter of 2009. New orders are contracting and fewer people are being employed.
John Mulcahy, head of research at Hong Kong- based AM Capital, an equities brokerage, contends that high leverage indicates that several banks and real estate companies in China are vulnerable. He believes, however, that the government will succeed in limiting any decline in overall growth to a 7 per cent annual rate, in line with its five-year plan.
Some regions and cities in the huge diverse nation are experiencing and will continue to experience wide growth discrepancies. Bottom line: China will do its utmost to employ the annual 20 million new school leavers and university graduates, Mr. Mulcahy said.
Morgan Stanley, meanwhile, warned that India is heading for the worst growth since the credit crisis. ‘India’s near-term growth outlook is deteriorating rapidly,’ the investment bank said. ‘We see a combination of factors - including persistently high inflation, a higher cost of capital, a cut in the ratio of fiscal spending to GDP, a weak global capital markets environment and a slow pace of investment - causing a further slowdown in growth.’
The bank also forecast a 30 per cent probability of recession in Australia and New Zealand.