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The banana skin risk

Economic growth
By Paul Hodges on 14-Jan-2012

Banana skins.pngThis week’s news provided more evidence to support the blog’s fear that the global economy is close to recession:

• The German economy, Europe’s motor, saw negative growth in Q4
• US retail sales grew just 0.1% in December, despite good auto sales
• China’s auto sales fell in Q4, and house prices fell in 60 cities

Equally worrying is that many policymakers seem blind to the risks of recession. Germany’s Chancellor Merkel, for example, remarked as recently as August that “I don’t see anything which signals a recession in Germany”. Yet only a month later, growth had already stalled.

The reason for this myopia is probably fairly simple. The global economy grew more or less continuously during the 1982-2007 period, and so policymakers are making the fatal assumption that this is ‘normal’.

As a result, their wishful thinking is creating additional risks for the economy as we move into 2012:

• On the Downside lie the risks of a Eurozone break-up, a hard landing in China, and a further downturn in the US housing market
• None of these risks is minor from a chemical industry viewpoint. They all have destabilising potential, particularly in terms of political risk
• Protectionism would be a very strong possibility if any of these areas went seriously wrong
• On the Upside, policymakers might panic if these events occurred
• They might undertake further stimulus efforts, on a massive and perhaps co-ordinated scale
• In terms of scale, they might each do a minimum of $500bn, making $1.5trn in total

None of us can judge the likelihood of the above events. They are like leaving a series of banana skins at the top of the stairs, and wondering whether anyone will fall and break their leg as a result.

The best response is perhaps to continue with a Base Case scenario that is based on the arrival of recession. A Downside scenario would then reflect the risks above, just as would the Upside scenario.

It is all a very long way away from the comforting consistency of the Supercycle days. But to do nothing in the face of the banana skins around, could also prove to be wishful thinking as well.