However, the truth is that the odds of a recessionary reprise are high in just a few countries – primarily those that have experienced excessive fiscal and monetary “stimulus,” or that have real inflation problems.
The rest of the world is recovering just fine.
Double-Dip Nominees
One country where the chances of future recession are substantial (though its economy never had much of a first dip) is India. Indian consumer price inflation was 13.9% in the year to May, while its three-month interest rate is only around 5.6%. That’s a recipe for bubble creation every time. Add in a public-sector deficit totaling around 10% of gross-domestic product (GDP) – when state budgets are included – and you see a system clearly headed for a sharp slowdown in the future, as the authorities battle monetary and fiscal chaos.
Closer to home, the U.S. economy looks likely to suffer a “double-dip” recession, or at least a very severe growth slowdown. The excessive fiscal “stimulus” injected into the economy since 2009 has failed to produce much job growth, while private-sector lending, particularly to small business, is being crowded out of the market: Bank lending to companies is down fully 25% since that particular market peaked in September 2008, according to U.S. Federal Reserve statistics.
The current position is unsustainable. After all, the U.S. savings rate has fallen back down near its 2007 level, the payments deficit is once again widening, and the U.S. budget deficit is at record levels and showing no signs of being brought down. Either the current levels of debt will be artificially shrunk by a burst of inflation (very possible, given the inflation in India and China), or the U.S. economy will experience a second, severe “dip.”
Or perhaps both will occur.
It is this wobbly U.S. position that is most familiar to traders, which is why it exerts the most influence over global stock markets.
The European Surprise
The European Union (EU) is fashionably derided in the United States. That’s partly because – in the eyes of most U.S. investors – “Greece” has become synonymous with “Europe.”
To be sure, Greece’s level of public debt is also so high that it is doubtful whether the country can escape without a partial or total debt default. And some other countries inside and outside the Eurozone – including Bulgaria and Romania – have allowed their cost bases and public sectors to get out of line with economic reality.
Some other European Union countries are in great shape. Germany, derided by Keynesians because of its cautious budget policies and by Wall Street because of its lack of a hedge-fund culture, is once again demonstrating what can be achieved through a commitment to cost-cutting and a devotion to quality.
Thanks to the weak euro, Germany’s current account surplus has swelled to 5.5% of GDP, while industrial production in the first half of 2010 was up 13%. The Germans are referring to this as the “blitzschnell” (lightening-quick) recovery. Readers suffering through the current U.S. recession can be forgiven for thinking that we could do with a bit of blitzschnell here, too.
In Asia, blitzschnell recoveries are a way of life, as their economies catch up with Western living standards. Commentators are worrying that China may overheat, but I don’t see it.
Modest monetary tightening by the People’s Bank of China has caused property prices to drop 20% in the last few weeks, taking much of the air out of what had undoubtedly become a bubble. Meanwhile, wages in the fast-growing Southeastern portions of China are growing rapidly, with the giant electronics manufacturer Foxconn International Holdings Ltd. (PINK ADR: FXCNY) raising its entry-level wages by as much as 60%.
These cost increases will cause inflation in Western economies, as the now-cheap Chinese goods become less so. And these increases will also reduce China’s payments surplus, as well as the pressure on its currency.
At the same time, however, the higher wages will also inject a massive amount of purchasing power into the domestic Chinese economy. That will finally rebalance it by allowing consumption to rise from its current, abnormally low level (of less than 40% of GDP) to a level that is representative of a normal, middle-income economy. This, in turn, will stimulate demand for Chinese domestic manufacturers, igniting continued expansion of the economy.
China may be in for a burst of inflation. But with a growth rate that’s unlikely to drop much below 8%, China is a long way away from a double-dip recession.
Where Investors Should Go “Shopping”
In the remainder of East Asia, the growth prospects for Korea, Taiwan and Singapore also appear excellent. Only Japan remains sluggish; there its outlook depends on the success of the new government of new Prime Minister Naoto Kan in finally reining in public spending and the budget deficit.
Finally, the prospects for the better-run parts of Latin America appear excellent, as high commodity prices continue to improve those countries’ terms of trade. I wouldn’t touch Venezuela or Argentina. And in Brazil I’d wait until after the October election. But the prospects for Chile and Colombia – and maybe even Peru – look excellent.
Overall, therefore, last week’s downdraft appears overdone. In most global markets, a double-dip recession appears very unlikely, and future growth will probably be vigorous as the recession is left behind.
Given that reality, investors should look for buying opportunities in East Asia (outside Japan), in Germany, and in the small Latin American markets of Colombia and Chile.
Leave a Reply