Last week, the National Institute of Economic and Social Research (NIESR) surprised many when it predicted only a modest slowdown in the US this year. It reckons the US will grow by 2.2 percent in 2008; that’s below trend, but hardly the stuff recessions are made of.
NIESR has a good track record too. It was a lone voice saying recession would be avoided in 1998 during the era of the East Asia, Russia and LTCM crises, for example.
Maybe banks are so pre-occupied with their own problems that they make the mistake of transposing their difficulties on to everyone else. They are blind, perhaps, to what is happening in the real world.
That may be true – but here is an individual whose credentials for predicting economic growth are every bit as impressive as NIESR’s, and he is saying the opposite.
Jim Rogers, legendary investor, co-founder with George Soros of the Quantum Fund, and famous for predicting the commodity rally in the late 90s, is altogether less sanguine.
“Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but I’m afraid it’s going to be much worse,” he told Fortune magazine. “Bernanke is printing huge amounts of money,” added the guru. “He’s out of control and the Fed is out of control. We are probably going to have one of the worst recessions we’ve had since the Second World War. It’s not a good scene.”
Well at least Rogers and NIESR have something in common. They are both critical of recent moves by the Fed in slashing interest rates. Last week, NIESR said “It is possible that the Federal Reserve acted precipitately to technical fall-out from losses at Société Générale in France, which seems to have sparked much of the panic trading. The Banque de France informed the Federal Reserve of the matter in advance of their meeting scheduled for the following week. It is possible that if the Federal Reserve had waited for all the information they needed, they might not have acted, and indeed they may have damaged their credibility by their precipitate action.”
Meanwhile, Capital Economics seems to getting a little more bearish. Latest data revealed a fall in non-farm payrolls for the first time in four years in January. It’s been the strong labour market that has led some to predict only a soft landing for the US. So when data starts telling a worrying story on the US jobs markets, you know it’s time to fret.
Right now, the US rate of interest is, in real terms, negative. Even so, Capital Economics is worried about the US housing market. The Case-Shiller 10-city house price index fell by a record 8.4 per cent over the 12 months to last November. But “more worrying,” it says, “is the acceleration in the decline. The 20-city index fell at an annualised rate of 16.2 per cent between August and November.”
It says, “With the excess inventory of unsold homes at an almost unprecedented level, prices are likely to fall a lot further. This could constrain consumption growth for a number of years, although it may not cause an outright decline in spending in any one or more quarters. The further house prices fall, the more risk there is of a complete consumer capitulation. On the other hand, the monetary and fiscal stimulus now in place will have a potentially powerful offsetting effect on consumers in the second half of this year.”
And there you see the dilemma. NIESR doesn’t understand why the Fed has slashed rates and the US government has announced such big tax breaks. Jim Rogers too is criticising the Fed, but for quite different reasons, but Capital Economics is saying the only hope for the US lies with the measures announced by the Fed and George W.
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