Over the six months to March, the global economy has shined. But in recent weeks, storm clouds have gathered with stock markets experiencing downdrafts and yields on eurozone sovereign bonds edging up to precarious levels.
Are we in for another turbulent spring and summer, like in 2010 and 2011? My previous post, “Recession: time for businesses and investors to fasten their seat belts?” touched on a few of the issues. Now we turn to the view of some of the market seers with “better batting averages,” including those mentioned in a January post, “Best of the 2012 market forecasts.”
Eurozone again looking shaky
The eurozone economy is slipping into recession. The region’s unemployment rate has climbed for 10 consecutive months to a new eurozone-era high of 10.8%. Burdened with too much sovereign debt, peripheral members of the European Union are slashing government spending to qualify for financial-aid packages. The austerity is fuelling recessionary forces that are now severe even in the larger peripheral members.
Notably, unemployment in Spain is currently above 23%. Mounting pessimism over the government’s fiscal targets and falling tax revenues is triggering a flight away from its bonds and, consequently, an upward move in yields. The cost of insuring against sovereign default has also staged a run-up to near-record highs.
“The trouble is that the eurozone has an austerity strategy but no growth strategy,” writes economist Nouriel Roubini at Project Syndicate. “All it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming.”
Tony and Rob Boeckh, editors of the Boeckh Investment Letter are on the same page. In their April 12 issue they note: “Social tensions are rising sharply again, reflecting 1930s depression-style unemployment rates and a resumption of recession. Coming elections in Greece and France in the next few weeks carry the possibility that opposition parties will take power and then markets may face a move to renege on policy commitments made by outgoing governments.”
John Paulson, the billionaire hedge-fund manager who foresaw the collapse of the U.S. housing market, thinks the crisis will deepen in the coming months. At a recent presentation to fund holders, according to a variety of news reports, he disclosed that his funds had sold short German government bonds.
For the first three months of 2012, the U.S. enjoyed a spate of positive economic news, highlights of which were fewer jobless claims and a drop in the unemployment rate. This is unlikely to last, say Jan Hatzius and other Goldman Sachs economists in a research note, ‘Sticking with Sluggish.’
Several reasons are offered. First, winter weather was unusually warm and shifted the usual spring-time increases in jobs and economic activity forward into the winter months. Second, inventory restocking has been occurring, but is likely to wane as shelves are replenished. Third, gasoline prices have risen to $4 a gallon in the U.S., siphoning off a good chunk of consumers’ disposal income.
The Economic Cycle Research Institute (ECRI) observes in a March report that year-over-year growth in U.S. GDP has been a sluggish 1.5% for the last three quarters, while the growth rates in personal income and industrial production have dropped to their lowest readings since the spring of 2010. The exception to this weak picture is year-over-year payroll job growth.
“However, the empirical record shows that job growth typically turns down after downturns in consumer spending growth, not the other way around. Because consumer spending growth remains in a cyclical downturn, we expect job growth to start flagging in the coming months,” warns ECRI.
David Rosenberg, chief economist for Gluskin Sheff Research, finds plenty of conflicting signals to the official employment numbers. “The Challenger [survey] hiring announcements are down 85% from year-ago levels …. National Federation of Independent Businesses hiring plans have [fallen] to a four-month low. The Job Openings and Labor Turnover (JOLT) data … have posted losses in three of the last four months …. the Conference Board’s ‘jobs hard to get’ index is higher now three years into this recovery, than it was anytime during the 1990-91 and 2001 recessions!”
China’s export model sputtering
China is slowing down as it wrestles with the unsustainability of its export-led growth model. Since 2005, China’s real effective exchange rate (i.e. currency rate adjusted for domestic inflation) has appreciated 30%, as pointed out by the Boeckhs. Along with the weak state of its trading partners, this creates a need for China to find internal sources of growth, notably increased consumption, as a replacement for export sales. The transition may not be a smooth one.
Perhaps the Boeckhs have it right when they say, “There are increasing signs of growing stress and tension in global economies … we continue to feel that a period of increasing strain in financial markets is likely ….”