Double dip?

Fears of a double dip have risen with many now expecting the global economy to slip back into recession by the end of the year. The clearest indicator of this possibility is the ECRI index for the US, which has fallen sharply in the last few weeks. In Europe, the German ZEW index has also dropped significantly since late last year. Other leading indicators are less clear cut. The JP Morgan all-industry PMI index, which summaries all the monthly national indices, peaked in April and fell slightly in May and June. The OECD lead indicator is still rising but its rate of change has decelerated sharply. It could also be argued that global stockmarkets which fell by 7.6% in the first half of 2010 are suggesting a deteriorating outlook.
It is perhaps not surprising that the decline in equity markets coincided with the onset of worries over Greece defaulting and the possible break-up of the euro-zone. The response of governments within the euro-zone has been to impose fiscal deflation on many of its member states. Germany has refused to reflate to compensate. Given the fragility of the global recovery, this is lunacy. The timing of the UK government’s desire to get its fiscal books in order, while generally desirable, leaves a lot to be desired. This moment in time is not the best for fiscal cut-backs. The other factor that is not helping is China’s need to tightening policy. China is running the risk of a property ‘bust’ and needs to bring bank lending under control. In the short run, this is negative but from a long term perspective, it is should ensure that China’ dramatic growth story should continue.
Generally, leading indices normally slow about 12 months into a recovery. This is often due to fluctuations in the inventory cycle, and the recovery reasserts itself a few months later. This may well happen this time but the concern is that the fiscal stimulus put in place by many governments in late 2008 is now coming to an end with nothing to replace it. If this is correct, it is beholden on governments to come up with a new fiscal stimulus and to bin any thought of cut-backs. St Augustine remains relevant – please make us virtuous but not yet.