No Man’s Land

We have, most likely, recession in Europe (confirmed already in a number of countries) with very weak data on both the manufacturing and the service sector side. 

We have ambiguous growth in China on the same metrics, and uncertainty with regard to its main engine, investment led growth.

We have a pedestrian crawl in “bad demographics” Japan.

And, we have a weak US recovery hitherto dependent on good winter weather (recently),  the consumer (lower savings, a rise in debt, marginal improvements in employment framed within historically weak income dynamics) and central bank intervention, but a recovery logically, from here on in, ultimately dependent on growth in global demand for its goods and services. 

Yet growth in world exports is slowing down (-ve Japan and Europe), with the strongest showing in the US in terms of recent growth rates.

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This is all before we add into the mix sovereign debt and the expected austerity to come, or if things get worse, the pump priming demand and silly money framework of QE and QE financed government deficit finance. 

We are currently in a no man’s land, a point where whatever is happening now may have little or no relevance to what lies beyond. 

We need growth that is not being cajoled by low interest rates and asset price manipulation, that is not at any point in time ready to collapse as demand disappears and the financial system slows to a crawl or inverts upon itself.   But since we are some way from fully working through the various debt and structural imbalances set in the years leading up to 2007, such an outcome is more wishful thinking than structural reality.  And of course, let us not forget all the other dynamics working away at the economic cliff face: demographics, pensions, medical and social security time bombs.

One cannot help but feeling that we are at yet another turning point, where the weight of the past’s debt dynamics in developed economies, and debt financed investment led growth in emerging, impinge on the momentum going forward.  Sovereign debt in many economies has continued to expand, yet the contribution of government expenditure to real GDP growth is now negative in many areas. 

Recent ISM Manufacturing PMI data shows moderate growth in US manufacturing, but one wonders whether the PMI is being overly influenced from a position of fuzzy relatives.  It is now more than 4 years since the onset of the last US recession, and we have been led to expect the worse for so long that a longer than usual period of marginal improvement may lead to false coordinates: good weather has helped domestic demand, so weather factors may well have combined with the traditional seasonal upturn to lead to a relatively good feel good factor and now are now in a period traditionally associated with higher manufacturing activity.  In other words if our coordinates are all screwed up, we may think things are better than they actually are.    

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