Think tank: Risks to economic growth overshadow false dawn

01 March 2013 09:07  [Source: ICB]

Investors and companies are pursuing a "false dawn" if they believe that today's financial market recovery will translate into a recovery in the "real economy where we all live and work", says International e-Chem chairman Paul Hodges on the ICIS Chemicals & the Economy blog.

Hodges questions the notion that full economic recovery is inevitable following the 2008 crash and the intervention of central banks worldwide to stimulate growth. He also suggests that we are not at a new beginning, but still at the end of an economic supercycle that persisted from 1982 to 2007. Some serious money can be lost in these uncertain times.

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It could be a false dawn for the global economic recovery

"I've been listening to a lot of people telling me that business is not very good since New Year, but that they remain totally confident things are about to pick up," Hodges tells ICIS.

"'Everybody knows' that full economic recovery is inevitable. And today, everybody absolutely knows that it must now be very close. After all, it has now been four years since the crisis began," he says in his blog.

"This expectation is understandable, as anybody who began work from 1982 onwards has only ever known constant growth. There might have been the odd short-lived downturn, but global GDP growth averaged a steady 3.5%/year between 1982-2007.

"The blog, however, has an alternate view. It believes this 25-year period was actually an economic supercycle, which will never be repeated in our lifetimes," he says.

"The analysis is based on work originally published by leading investor (and EPCA speaker) Marc Faber on the life cycle of emerging markets.

"He argued in Barrons (13 July 1992) that markets had a common life cycle, divided into six different phases. He thus headed his article: 'A time to buy, and a time to sell'."

Hodges notes that if his analysis is correct, investors will eventually give up on stocks; currency wars will break out as countries fight to maintain employment; and protectionism will become a real risk.

"At worst, as Unilever CEO Paul Polman warned [in January], 'the biggest issue in Europe (and perhaps worldwide) is going to be social cohesion'.

"The blog would be delighted if its analysis is wrong. But just as in September 2008, it feels the need to set out the risks as clearly as possible,' says Hodges. "It fears that time spent preparing your business's response to this scenario might well prove by year-end to have been time well spent."

By: Nigel Davis
+44 20 8652 3214

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