Recession the base case scenario for 2017

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ICB Jan17

It is hard to be optimistic about the outlook for 2017.

The good news is that policymakers are finally giving up on the idea that stimulus can somehow return us to the growth levels seen when the Baby Boomers were young.  As the Bank of England note in a new Report:BoE Dec16a

  “Economic theory suggests that a fall in interest rates should lead to higher household spending, because lower returns on savings decrease the amount of future consumption that can be achieved by sacrificing a given amount of spending today
  But as the chart shows, “when asked about how they might respond to a hypothetical further fall in mortgage payments, households reported that paying off debt and saving more were likely to be a more common response than increasing spending”
  45% said they would save more, 50% said they would use money saved on mortgage payments to pay down debt and only 10% said they would increase their spending.

Unfortunately, companies and investors will now pay the costs of this failed experiment, as markets return to being based on supply and demand fundamentals, rather than central bank money-printing.   Five major risks face the global economy, as my new 2017 Outlook highlights:

 Global recession: The American Chemistry Council (ACC) index of global capacity utilisation is the best indicator that exists in terms of the outlook for the economy. As I noted last month, it has been falling since December 2015, and its latest reading is close to the all-time low seen in March 2009
□  Populist policies are gaining support: Populists provide simple answers to complex questions, and 2016 saw them gain major success with the Brexit vote for the UK to leave the EU, Donald Trump winning the US Presidency, and Italy’s referendum creating the potential for the country to vote on leaving the euro
□  Protectionism is replacing globalisation: One key result of these changes is that countries are turning inwards. The Doha and Transatlantic Trade and Investment Partnership trade deals are effectively dead, and President-elect Trump has promised to cancel the Trans-Pacific Partnership deal on coming into office
□  Interest rates are rising around the world: Investors have begun to worry about return of capital, rather than just return on capital. Benchmark 10-year interest rates have doubled in the US since the summer. They have also trebled in the UK and doubled in Italy, while negative rates in Germany and Japan have turned positive again.
□  India’s economy is under major strain as a result of the currency reforms, and China’s debt levels remain far too high for comfort. Its housing bubble in the Tier 1 cities has reached price/earnings ratios double those of the US subprime bubble.  Its currency is also falling as the economy slows, creating the potential for further trade friction with the new Trump administration

Please click here if you would like to read the full Outlook, and click here to view my 6 minute interview with ICB’s deputy editor, Will Beacham.  You can also click here to download a copy of all my New Year forecasts since 2008, when I was warning of a coming financial crash.

 

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