global recession in 2005? That is the prospect raised by Brian Reading, the veteran economist from Lombard Street research.
ELMAT: Well, at least someone is thinking along the line I think.
Global recession in 2005?
By Philip Coggan, Investment Editor
Published: April 28 2004 11:47 | Last Updated: April 28 2004 11:47
A global recession in 2005? That is the prospect raised by Brian Reading, the veteran economist from Lombard Street research.
Such a forecast, however tentative (Reading says that a "world recession is possible, even probable, in the next two or three years" but only mentions 2005 in the title of his note) is certainly contrarian. Most economists have been ratcheting their growth forecasts higher in recent months.
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But Reading says the US is "no longer a locomotive economy". Successive asset bubbles have kept the economy moving forward but when those bubbles burst "it will be impossible for the US to correct domestic financial imbalances without a recession." Since the US is the world's largest importer, a US recession will be a drag on global growth for several years.
Reading sees little hope of the UK, continental Europe or Japan providing enough energy to push global growth forward.
That leaves China. Reading thinks that the Chinese economy is almost certain to collapse in 2005. The Chinese have overinvested, with investment reaching nearly 50 per cent of GDP. a 10 per cent decline in investment would thus knock 10 per cent off GDP growth in 2005.
If that decline were to coincide with a slowdown in the US, as the effect of the Bush tax cuts fade, then Mr Reading's forecast could turn out to be right. It matters little that his views are not accepted by the consensus, since the consensus usually fails to spot economic turning points.
I think Mr Reading is right that the recent period of loose monetary and fiscal policy in the US has only stored up trouble for the future. Whether the reckoning will come as quickly as 2005 is harder to tell.
One of the most astute criticisms of Bush policies (made by the likes of Paul Krugman) is that the US should have used the early part of this decade to store up surpluses ahead of the inevitable deterioration in public finances towards 2010, as the baby boomers retire. There was a case for a Keynesian-style tax short-term tax cut, aimed at the poor, but instead Bush launched permanent tax cuts, aimed at the rich. But this problem will only emerge over the medium term.
As for the monetary stimulus, it has given the US economy a hit. Any junkie will enjoy a hit; the problem is getting the economy to go cold turkey. The Fed is trying to wean the economy off gradually, by hinting at future rate rises. But we just don't know whether this will be successful; a similar attempt failed in 1994. An adverse reaction to Fed rate rises is the most likely trigger for Reading's prediction to come true. |
