The US is tottering. Latest figures say the US economy expanded by an annualised rate of just 0.6 per cent in the first quarter of 2008. Opinion is still mixed as to whether Uncle Sam will fall into full blown recession, or merely go close. Many expect recession, but in contrast the National Institute of Economic and Social Research has forecasted growth of 1.3 per cent this year – not good, but neither does this signify recession.
In the UK, it forecasts growth of 1.8 per cent both this year and next – that marks a slow down, but if the forecast proves right, the dream of uninterrupted economic growth will remain intact.
Recently, some leading and highly respected economists have suggested the credit crunch has passed the halfway stage – but others are still describing the crisis as the worst ever peacetime financial crisis.
In the US, this particular downturn is unusual because it has been led by falling house prices – unlike, for example, the previous recession which was caused by factors such as the dot com crash and 9/11.
House prices are now falling in the UK. It has now become a question of how big the falls will be, and for how long.
But opinion is mixed on how much this matters. Some say that there is so much spare equity in the UK housing market, that even if prices fell by 10 per cent, only a relatively small number of property owners would face negative equity.
Furthermore, many argue that consumer spending is only slightly influenced by house prices, so a fall in house prices will not lead to a corresponding fall in consumption. Others say this flies in the face of common sense – and of course falling house prices will lead to falling consumption.
Furthermore, they argue, house prices were pushed up too high by the irrational belief that house prices only ever go up – that the housing boom was at heart a speculative bubble and that house prices will overcorrect on the way down.
| Bull points | Bear points |
| The current chairman of the US Federal Reserve also happens to one of the leading academic experts on the 1930s depression. Ben Bernanke spent years studying what could be done to avoid a repeat of that unhappy era – and he has been putting this knowledge into practice. | No two recessions ever have identical causes. The current financial crisis has significant differences with the 1930s depression – in particular the effect of globalization and rising commodity prices. What would theoretically have worked in 1929, may not work today, and could, by stocking up inflationary pressures, make things worse in the long-term. |
| The Bank of England has instigated an unprecedented measure to push liquidity back into the markets – by allowing banks to swap triple A, but illiquid, mortgage security into Treasury bills; this should restore inter bank lending. | Too much money was lent earlier this decade, creating too much debt. As house prices fall both in the US and UK, much of this debt can not be repaid. No amount of new money can alter this fundamental truth. |
| Warren Buffett, the world’s richest man, recently indicated recently that right now is a going-buying opportunity as he announced plans for major buying. In general, economic slowdowns often represent good buying opportunities. | But given the pessimistic economic forecast, equities have not yet fallen to the level one would have expected. George Soros recently predicted another dip to follow. |
| Thanks to the rise of economies such as China and India, the global economy is no longer reliant on the US. | But the US remains the most important economy. The dollar is falling and so are US imports – it remains to be seen if the global economy can afford to see its biggest customers tighten its belt. |
| The US government is boosting the US economy via a massive $150bn tax credit – which will boost some households by $1,200. Keynes once said in times of a debt crisis, cuts in interest rates are ineffective, as the last thing you need to do is try and get people to borrow more. He likened this to “pushing on string.” But the plan to give back tax to US consumers is exactly what Keynes would have recommended. | Many expect US consumers, who are so worried about prospects, to simply save the tax credit. In any case, the extra amount US consumes are spending on oil could counter-balance the benefit of the tax credit. |
Comments
One Response to “Economic snapshot”
Trackbacks