IS THE RECESSION DANGER GONE?

Questor November 07, 2019

The performance of markets last week might seem to indicate that there was no longer an imminent recession threat after all, but economic indicators are all still pointing to a slow down, so the market must be betting that governments will be doing something to stop it happening.

On Wall Street US share prices reached a new all-time high

A surprise bounce in Chinese manufacturing has boosted shares in Asia to three-month highs and stock markets in Europe have followed their lead.

The latest Caixin/Markit monthly survey showed China's factories ramped up activity at the fastest pace in more than two years in October as export orders rose. Its manufacturing purchasing managers’ index rose to 51.7 from 51.4 in September, marking the third month of expansion.

The German economy, meanwhile, is unquestionably slowing. The country’s economic ministry on October 17th downgraded its gross domestic product growth forecast for this year and 2020 to 0.5% and 1%, respectively. That will put Germany near the bottom of Europe’s growth charts this year. Only Italy, whose economy is not expected to expand this year at all, will fare worse.

As Europe’s powerhouse, Germany is dragging down the region’s economies. The German government seems deaf to the many voices, within and outside the country, urging it to do something. It can argue that the causes are beyond its control. Uncertainties due to trade war threats, Brexit, and emerging countries were bound to hit Europe’s largest export-oriented economy.

The travails of Germany also raise the question of whether the country is experiencing a temporary malaise or going through the first signs that its economic model needs readjusting.

Every indicator in the last few months points to the risk that Germany has entered a technical recession, defined as two consecutive quarters of declining gross domestic product. Germany’s GDP shrank 0.1% in the second quarter. That in itself would not be a major sign of worry if the recession stayed, indeed, “technical,” and looked like just a bump in the road. But this is not the case. On the contrary, there are now signs that the troubles of Germany’s manufacturing industry, where everything started, now are affecting the rest of the economy.

According to the Munich-based Institute for Economic Research, which publishes a monthly indicator on economic sentiment closely watched by market analysts and policy makers, “in manufacturing, the business climate has only one direction: downward.”

Christine Lagarde’s first day as president of the European Central Bank after Mario Draghi’s departure comes at a time when the next big crunch could be just round the corner.

EU leaders formally appointed Christine Lagarde last Friday to become European Central Bank President on November 1.The former International Monetary Fund boss and French Finance Minister will serve a non-renewable eight-year term as President, succeeding Mario Draghi.

The tightly knit central banking fraternity, which was expecting the candidate to come from within the ranks of eurozone national central bank chiefs, is said to be aghast. As one insider put it: “It’s as if we’re going from ‘whatever it takes’, the phrase used by Draghi when he opened the money printing tap, to ‘whatever.’”

That poses a serious risk in an era in which growth is slowing, inflation sits stubbornly below the ECB’s target of just under 2 percent, interest rates are stuck at zero and the ECB is rapidly exhausting the supply of eligible government bonds it can buy to stimulate the economy.

Against this background, the calling of a general election in UK with a possible Conservative victory and the resolution of the Brexit statement has had a dramatic effect on the perception of the value of sterling which has gone up 6% since Johnson came in.

HSBC estimates that fair value for selling ranges from $1.45 to $1.60 under any plausible measurement.

“It could move a long way $1.45 to $1.6,” said David Bloom, HSBC veteran currency strategist, “a lot of investment has been mothballed because of uncertainty, but we could see those mothballs wither away quickly once there is clarity. It could be radical.”

 

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