Debt, and global structural economic and financial imbalances remain the key factors behind growth potential and risks to growth. These have changed little, and if anything, dynamics and absolutes have worsened in many areas: think Eurozone sovereign and financial system debt; Japan sovereign debt; China dependence on investment led growth and also China debt; US sovereign debt and still significant consumer debt dynamics.
We remain in a low growth dynamic with plenty of downside risk, with little leeway to stimulate and support economic growth in the event of economic contraction – note low interest rates, high sovereign debt and still significant legacy capital allocated to unproductive assets. The dynamics of growth in a high debt environment where there is a greater dependence on structural change (consumption versus investment) and complicated by monetary debt dynamics are complex.
What we have seen as growth in many areas recently may not be sustainable, or capable of itself being used as a base on which to compound. We are living in a faith based economic paradigm supported by central bank machination: “if we can ignore the risks and keep plodding on then hopefully, just hopefully, some of the positives may stick and remain and prove real” is the implicit mantra.
We need to expect low growth, as an upper bound, of some 1% to 2% below what we may consider normal growth, and significant downside risk for some time. Recent growth in say the US, has probably been above that which the economy is capable of delivering on its own and, as implicated, growth abetted by short term stimulus, is just as easily rolled back.
Data from the Eurozone flash (PMI) and political developments (Holland) reinforce the force to the downside. Note also the relatively weak China flash PMI data, although the major player as far as China goes is gross fixed capital investment.
US durable goods order trends are also weakening:
Led by a decline in transport, in particular aerospace:
As have non defense capital goods ex aircraft:
US weekly unemployment claims also remain weak relative over the last 10 weeks relative to data going back to 1997:
US retail sales however are showing their best quarterly results since at least 1993:
The UK has moved back into recession: an economy free of Euro constraints on interest rates, currency and money supply (QE), but belaboured with high consumer, financial system and sovereign debt, and this despite monetary stimulus and low interest rates. Note also the deteriorating sovereign debt outlook and continued implementation of austerity measures.
Chart data is taken from US Census Bureau data sources.