There are encouraging signs that the recession of 2009 is over, but where is the all-important US economy?
There are encouraging signs from around the world that the worst of the recession of 2009 is over, except in Japan, the EU and the UK, which account for about 40% of world GDP.
The BRICS are definitely charging ahead, but China is overheating with Q1 growth of 11.9% and there will be higher interest rates there before long, which will cause the surging stock market to fall. The BRICs’ economies have disconnected to an increasing extent from the West, because they are slowly turning towards their own infrastructures and can produce much of their raw materials or procure them from Africa, which is consequently also a BRIC beneficiary.
But where is the all-important US economy? There, the authorities have called the end of the recession, which they have not been able to do in the UK. The key data are the US unemployment figures, showing 240,000 new non-farming jobs in March, but these included 48,000 new signings for staff for the next US Census. House repossessions, however, are at a 5-year high and the consumer is still in hibernation.
Nevertheless, there are better figures for the massive auto industry and there has not been, yet, another bank in financial trouble, although the SEC’s writ against Goldman Sachs for fraud hasn’t helped the climate. If this trend continues positively for the rest of 2010, then the US will definitely be out of recession. If… The trouble is that the Federal Deficit is going through 100% of GDP, and rising.
All of which leaves Japan, which is terminally bust, and the EU and the UK as the laggards. The problem is that there are massive national debts, all in excess of the 60% to GDP criteria set out in the Maastricht Treaty, combined with high unemployment, which is a truly lethal mixture. Japan’s debt is 235% of GDP, the US is 100% and the EU and UK are at 88%.
Something has got to give, and it has in the €urozone, with the EU/IMF €45.0 billion rescue package for Greece. We all know now that Goldman Sachs and others helped Greece deceive the ECB monetary authorities over Greece’s entry test, but this €45.0 billion is not the last play in this game by any means, and is in fact the beginning of the inevitable break-up of the €urozone as presently constituted. It is also the herald of higher worldwide interest rates to come.
The world economy is still weighted overall to risk, and the reward side of the equation, as far as stock markets are concerned, has been largely harvested for now. The issue in the west is the successful unwinding of all the QE and other aid packages as part of the restoration of public finances, and the de-leveraging and return to rude health of the banking system.
There is still a long way to go, so best to expect some bumps along the way. The next six months are set to be the real test that answers the question decisively, one way or another.