Global economy in stagflation: Recessflation in the US, soft growth in Europe, recession (3rd quarter 2007 – 2nd quarter 2009)

Last October 16 in GEAB N°18, LEAP/E2010 anticipated the following:

According to LEAP/E2020, the key information of these last months has been the confirmation of the US consumer’s insolvency, a situation that erases the main factor of economic growth in the US. The two “engines” that were expected to take over did not last long. Corporate investment is no longer even mentioned by the most optimistic analysts (1). And export remains largely insufficient to replace the consumers, as proved by the weak variation in the US trade deficit, still located between 55 and 60 billion USD per month (nearly stable), while over a period of twelve months, the US currency lost 15 to 20 percent of its value against the other important currencies.

In consequence, LEAP/E2020 maintains its estimation that a recession has already started (2) though it is masked by the official statistics which, for instance, counted hundreds of thousands of job created in the building and housing sector during the first 9 months of 2007. If this is really the case, then the US economy follows rules totally unrelated with a market economy. In the past few months, the service sector, financial services in particular, was maybe the only sector left to create real jobs. Even this is now over as the financial institutions announce each day massive layoffs. Government jobs are nearly the only ones left now to contribute positively to monthly job creations. Creating civil servants, this is a clear indicator of an economy trying to avoid a recession. Unemployment figures remain nearly stable because, according to the official statistics, participation to the job market decreases: less people wish to work, thus layoffs are largely compensated in the statistics. In reality, all this is another story (3).

If anything is really climbing however, it is the prices. Inflation is imposing itself worldwide, including in the US (4). From China, the world’s workshop (where it reaches above 10 percent), to agricultural commodities (wheat and milk are breaking records), the price of current consuming goods will rise significantly in the months and years to come.

The Eurozone will slow down drastically without entering into recession. Indeed commercially and economically, it is more linked to Asia than to the US. Europe’s financial sphere only remains incestuously linked to the US.

For the UK, the outlook is gloomier because this country’s economy is over-exposed to US trends and utterly dependent on finance. Recession is probably ahead (5).

As for Asia, LEAP/E2020 estimates that the situation will depend on Asia countries rapidity in overcoming the effects of a recession in the US by energising their intra-regional exchanges and those with Europe. Over a period of less than two years, Asia will probably follow a quick process of micro-recession soon followed by a recovery.

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Notes:

(1) « Why a weak US Dollar hurts US manufacturers », Euro Pacific Capital, 12/10/2007

(2) « Economy sends off warning flares », Washington Post, 25/09/2007

(3) « Massive jobs disaster », Mish’s Global Economic Trend analysis, 23/09/2007

(4) « Beware – the Bernanke Fed could ignite hyper-inflation! », Financial Sense, 19/09/2007

(5) « Signs of slowdown in Britain », Spiegel/BusinessWeek, 10/10/2007