When's The Recession?
A couple of quarters ago I bet my friend and fellow analyst, B, that we'd have a recession by the second quarter of 2005. Fifty bucks on the line. A recession being defined as a quarter of negative real GDP growth. Right now it looks like I'm going to lose the fifty, which I can ill afford at present but never mind. Certainly B is not a guy to bet against lightly, and it is to his credit that he persuaded me down to fifty from a hundred.
You could see his point. There was no sign of a slowdown in GDP growth at that point, and with both short and longer term rates at historically very low levels it didn't look all that likely: usually it's high short term rates that's responsible for recessions. All the same, my reasoning went, the best time for a recession, from the viewpoint of a political incumbent, is right after the election. Get it out of the way before the mid-terms and try to get the economy roaring again at the four-year mark. Actually it's not as true as it used to be -- recessions have been remarkably scarce in the last 20 years compared to historically. Anyway, I'm pretty cynical, as you may have gathered, about the current incumbents. They'd be the type to play it safe.
It's surely coming at some point. Expectations are continually being revised downward in Europe: France is a little stronger than it has been, though confidence there is at a 15-month low; Italy is looking weak; growth in the UK is pretty minimal and expectations are going more in a southerly direction; and the latest confidence index from Germany, the largest economy in Europe, was unexpectedly low. Japan is flirting with recession once again, and in South Korea factory output recently suffered its worst decline in seven years. (Thanks to the FT's excellent Philip Coggan for some of this info). Latin America is going gangbusters, it's true, as you'd expect from resource-rich regions (ditto, for example, Australia and oil-rich Former Soviet Union countries). Then there's China. Lord knows what's going on in China. Can you really believe the numbers they publish? And, with all the recent news about graft and fraud in the banking industry, not to mention the incredible bad debt levels, can you really expect that economy not to crash at some point? When it comes, it'll be a big one, IMO.
Exports were only 10% of US GDP in 2004, so it's not critical that the rest of the world be thriving, but it certainly helps. Imports (-15% of GDP) are likely to go up, because the dollar is weak. Oil, for instance, is costing a lot more this year. Government spending (about 20% of GDP) is going to stay high, we can pretty much count on that. The biggest factor, of course, is the consumer -- about 70% of GDP in 2004. What will bring him crashing down is a rise in interest rates. That really puts the crimp on big-ticket durable goods spending (cars, large appliances, etc); and these days when so much spending is on the credit card, it's not just big-ticket spending that will get hurt.
Maybe I'm going to be out fifty bucks, but I'm still betting on a recession before the end of 2005. Any takers?
You could see his point. There was no sign of a slowdown in GDP growth at that point, and with both short and longer term rates at historically very low levels it didn't look all that likely: usually it's high short term rates that's responsible for recessions. All the same, my reasoning went, the best time for a recession, from the viewpoint of a political incumbent, is right after the election. Get it out of the way before the mid-terms and try to get the economy roaring again at the four-year mark. Actually it's not as true as it used to be -- recessions have been remarkably scarce in the last 20 years compared to historically. Anyway, I'm pretty cynical, as you may have gathered, about the current incumbents. They'd be the type to play it safe.
It's surely coming at some point. Expectations are continually being revised downward in Europe: France is a little stronger than it has been, though confidence there is at a 15-month low; Italy is looking weak; growth in the UK is pretty minimal and expectations are going more in a southerly direction; and the latest confidence index from Germany, the largest economy in Europe, was unexpectedly low. Japan is flirting with recession once again, and in South Korea factory output recently suffered its worst decline in seven years. (Thanks to the FT's excellent Philip Coggan for some of this info). Latin America is going gangbusters, it's true, as you'd expect from resource-rich regions (ditto, for example, Australia and oil-rich Former Soviet Union countries). Then there's China. Lord knows what's going on in China. Can you really believe the numbers they publish? And, with all the recent news about graft and fraud in the banking industry, not to mention the incredible bad debt levels, can you really expect that economy not to crash at some point? When it comes, it'll be a big one, IMO.
Exports were only 10% of US GDP in 2004, so it's not critical that the rest of the world be thriving, but it certainly helps. Imports (-15% of GDP) are likely to go up, because the dollar is weak. Oil, for instance, is costing a lot more this year. Government spending (about 20% of GDP) is going to stay high, we can pretty much count on that. The biggest factor, of course, is the consumer -- about 70% of GDP in 2004. What will bring him crashing down is a rise in interest rates. That really puts the crimp on big-ticket durable goods spending (cars, large appliances, etc); and these days when so much spending is on the credit card, it's not just big-ticket spending that will get hurt.
Maybe I'm going to be out fifty bucks, but I'm still betting on a recession before the end of 2005. Any takers?
posted by econoclast at 3:27 PM
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