Double-dip fears as US recovery falters
Fears that the US is about to drag the rest of the world into a double-dip recession gripped investors by the throat this week, plunging markets into a dark frame of mind.
By Angela Monaghan
02 Jul 2010
It was a shocking week for equities, which plummeted on a slew of bad news. The FTSE 100 closed at 4838.09 on Friday, up 0.7pc on the day but down 4.1pc on the week. The German DAX was 4pc lower on the week, while France’s CAC 40 and the US Dow Jones were both down 4.9pc after a week to forget.
“Markets seem to be in the mood to worry, as they contemplate what the second half of 2010 will bring,” said Ian Harwood of Evolution Securities.
The focus this week switched to the US, and a string of terrible data which prompted fears that recovery in the world’s largest economy is losing steam, and is about to lead the rest of the world into a double dip.
There are concerns too that growth in China is slowing and may not be able to provide sufficient support to the rest of the world. And lastly, while the fevered panic over the eurozone debt crisis, impending austerity, and social unrest has abated, anxiety has not been erased.
The bad news from the US this week included a nasty drop in consumer confidence; a fall in US non-farm payrolls; and plunging home sales. The UK, reliant on world trade to give its fragile recovery wings as it embarks on an eye-watering fiscal squeeze, would inevitably be pulled down with the US if a renewed slump took hold.
And there were signs this week that some areas of the UK economy are already becoming vulnerable to a second shock. A Bank of England report suggested British households are in store for a second credit crisis, with banks and building societies expecting to rein in lending yet again; the recovery in house prices all but stalled in June, with prices rising just 0.1pc according to Nationwide; and the manufacturing PMI indicated a sharp slowdown in exports growth in June.
It is not just the FTSE 100 which is reflecting fears of a double dip in the UK, Bank of England policymakers have given explicit warnings too.
Adam Posen, a member of the Bank’s Monetary Policy Committee, said “the renewal of a severe recession” was a very real possibility. “Much of what determines our outlook will take place beyond our borders and certainly beyond the MPC’s remit,” he added. Not terribly heartening.
Nor was a warning from Pimco – the world’s largest bond house – that the early fiscal tightening in countries including the UK and Germany is not necessary. According to Scott Mather, Pimco’s head of global portfolio management, not only is it unnecessary, but it has created a “growing risk” of sinking those economies back into the recession they are still in the process of clawing their way out of.
“There are parts of Europe where austerity wasn’t called for immediately,” he said, citing the two European heavyweights as examples. “It’s made us bring forward our expectations for a drop in growth and a drop in inflation within the eurozone.” Pimco is maintaining its underweight stance on the pound and the euro.
Whether immediate or delayed fiscal tightening is the best medicine for the UK economy is a debate which will run on in the domestic arena.
The hope, outlined in the Office for Budget Responsibility’s Budget forecasts, is that as the public sector and households tighten their belts, private sector strength and demand for our goods abroad will be enough to drive recovery of around 2.5pc from 2011. Those forecasts look increasingly at risk.
“The prospects for world trade are darkening,” said Stephen Lewis of Monument Securities. “In the USA, a wide range of employment and housing market statistics have pointed to weaker activity, while manufacturing, which had been relatively resilient, appeared to lose momentum last month.
“Doubtless, the other growth hub, China, is still expanding strongly, but perhaps not at quite as rapid a rate as at the start of this year. China’s output does not have to contract for the rest of the world to feel the draught from its cooling economy.
Not all are convinced that a morbid fascination with a double-dip is justified, and Mr Harwood is among the optimists.
“During recent months we’ve become increasingly concerned that the markets are focusing less and less upon what is going right – and, crucially, what’s likely to continue to go right – and, conversely, more and more upon what might go wrong,” he said.
“Our own view is that such a “hard landing” outcome is unlikely and that the global economy will instead experience a continuing economic recovery, with inflation remaining low and well-behaved.”
With the fate of the world economy such a huge unknown, the markets have taken fright, for there is nothing they like less than uncertainty. That point home has been hammered home to great effect this week.