The FTSE 100 tanked again yesterday. It fell by more than 100 points. It’s now at its lowest level since September.
As we noted yesterday, the basic problem for markets now is that the recovery is running out of steam. Without the government stimulus there to prop it up, data in sectors from manufacturing to housing is disappointing investors who’d hoped that the private sector could get up and stand on its own two feet.
As one Australian fund manager tells Bloomberg this morning: “Despite accommodative monetary policy in various parts of the world, we’re yet to reach a point of self-sustaining recovery.”
You can probably see what’s coming next. If the global economy isn’t strong enough yet to stand on its own two feet, then why not throw a bit more stimulus into the mix?
That would be a mistake. But it probably won’t stop governments from trying…
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- Harvest profits from agricultural growth
Prospects for the global economy are looking gloomier by the day. We’ll start with the US economy. The outlook for the US consumer – one of the most important drivers of global growth – isn’t very pleasant.
The US economy remains mired in problems
For one thing, the US housing market is nowhere near a recovery. A government tax credit for first-time buyers expired in April. Since then, the news has been nothing but bad. The number of pending sales of ‘previously-owned’ homes fell by a record 30% in May. Sure, you’d have expected a fall, given the end of the tax credit. But most analysts had been betting on a 12% fall.
Manufacturing data for June was disappointing too. The sector is still growing, but at a far slower rate than indicated in May.
The next big hurdle is the US payrolls report, out early afternoon our time. By now, after the gloomy week we’ve had, expectations for this will be so low that chances are we’ll see a bounce if it’s anything other than utterly grim. Analysts reckon that total US payrolls fell by around 110,000 workers in June, reports Reuters. If it comes in anywhere near that, we’ll probably get some sort of relief rally. (The main reason I mention this is in case you’ve been tempted by recent falls to short the market – just make sure your stop losses are in place).
But as for the longer run, even if the payrolls are better than expected, I wouldn’t read too much into it. The figures are pretty revision prone. A better jobless indicator, as far as we’re concerned, is the weekly tally of initial jobless claims. My colleague David Stevenson has been following these and their relationship to the S&P 500 closely recently. Suffice to say if the number of Americans out of work keeps rising, you can expect the market to continue falling.
So what does all this mean? If the US is still in the doldrums, we can largely expect the rest of the world to follow suit. That would be true even if every other country was in a state of fine economic health. And of course, they’re not.
Europe is still a minefield of fear and debt
Europe is still a minefield of fear over government debt and banking stress tests. There’s been a relief rally in the euro due to the lack of demand for funds from the European Central Bank this week. But we wouldn’t bet on the region being out of the woods yet.
And tighter bank lending is a concern in Britain too. The Bank of England’s credit conditions survey, released yesterday, suggests that mortgage lending is likely to fall in the third quarter of this year. That won’t be good for house prices, particularly if it coincides with rising unemployment.
In short, economic conditions look set to go from “tense but benign” to “increasingly unpleasant” as the year progresses. This is all happening at a time when governments across most of the world, are proclaiming the new religion of austerity. And nowhere more than Britain.
Now we think austerity is a good idea. Pulling the state out of areas where it isn’t needed is sensible. So is simplifying the system overall, making it easier for entrepreneurs to set up and thrive. And cutting our debt pile, thus making ourselves less vulnerable to fluctuations in market sentiment, is sensible too.
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Austerity is good – but it’s no miracle cure
But don’t imagine for a moment that it’s some miracle cure. If the economy double dips, it’ll be because we never sorted out the original problems in the first place. The banks are still broke and as we’re seeing now, the rally has been based on stimulus and money printing. But austerity measures certainly won’t make the process any easier. And because the double-dip will coincide with ‘austerity’ measures, that’ll give its critics all the space they need to blame it for the fresh slump.
Our politicians can talk a big game about fiscal responsibility right now. But how committed will David Cameron and George Osborne feel if the FTSE 100 falls back to 4,000? Or lower? How will their approval ratings look if house prices start to slide again?
Or as Dylan Grice at Societe Generale points out: “How will Cameron’s coalition partners cope?… Can the UK’s new coalition government and its pre-emptive austerity plans both survive? My guess is that one will have to go, and it will be austerity.” The danger is that if that happens, “it will be even harder for future governments to get wayward balance sheets under control.”
As Hugh Hendry recently told MoneyWeek’s editor-in-chief, Merryn Somerset Webb, the next slump will give global governments all the political legitimacy they’ll ever need to hit the printing presses even harder. And that’s why we’ll be hanging onto gold, even although – as my colleague Dominic Frisby pointed out recently – it may well fall back from here as asset prices in general start sliding again.
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