That doesn’t mean that whatever it is that’s coming for Western growth isn’t priced in, but it definitely is not recession. Needless to say, then, if you think a recession is coming then ipso facto markets are going much lower as well.
In short, I see no reason why ongoing austerity measures won’t set in motion a negative feedback loop of retrenching US and European consumers and further equity market volatility. Moreover, I can see this cycle culminating in a rise in inventories and a subsequent wind down cycle, ending the business cycle globally.
This is now my base case, but I can see several influences working against it. The first is that the US (but not European) oil price has corrected significantly. However, oil economist James Hamilton has an argument weighs against that hope:
Earlier this year, disruptions in Libya and the resurgence of demand from the emerging economies sent oil prices up sharply, a development that many economists believe contributed to the slow growth for 2011:H1. The chaotic markets of the last few weeks saw oil prices drop back down to where they had been in December. Will that be enough to revive the struggling U.S. economy? There is some evidence suggesting that it may be too late.
The argument is substantiated with fairly technical data. But even if we accept some positive effect, a glance at the attached chart shows that the gasoline price in the US is still substantially elevated.
The other reason I can think of a reason to hope that a Western recession may not be a foregone conclusion is that Chinese policy makers appear to have shifted their tightening regime. That may also boost growth some in emerging markets and market sentiment a little.
However, BRIC economies have an aggregate GDP of $10-11 trillion versus combined EU and US GDP of $30-31 trillion and all tend to be very export dependent on the latter.
Markets can run for a while on technical relief but I don’t expect it to be sustained.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.