“How things change,” says Stephen King in The Independent. Until recently everyone was worrying about inflation. “The big problem now is growth” – or the lack of it. Manufacturing surveys around the world “provide a consistently miserable message: the momentum of economic growth has slowed”.
The latest problem in the US, the biggest economy, is a renewed uptick in the unemployment rate to 9.1%. Temporary employment, often a leading indicator, has slid for two successive months. “It is now pretty clear”, says Capital Economics, that the economy has “hit a brick wall”. The situation is “worryingly familiar, a kind of Groundhog Day”, says Fidelity’s Tom Stevenson in The Sunday Telegraph. Last summer, data began to disappoint and “markets had a nasty wobble” as they feared a return to recession.
The crisis of 2008-2009 “continues to define the economy and the markets”, says John Authers in the FT. This isn’t a typical economic rebound. After a credit bubble bursts, recoveries are subdued and shaky. The debt overhang (public and private), negative equity in the housing market and battered banks “push downwards”, offsetting or negating the impact of low interest rates. “There is enough life” in Western economies “to stir with low interest rates but not enough… to withstand a hint of higher rates”. “The fiscal and monetary brakes” are now being “very lightly applied”, agrees Buttonwood on Economist.com. But “even that light touch” seems to be enough to undermine the recovery.
The trouble is that markets have become “addicted to monetary stimulus”, as Stevenson points out. Stocks bounced last summer once the US Fed signalled that another round of money printing (QE2) was in the offing. But even with QE2 the recovery has been sub-par and vulnerable to tightening measures. So it may be hard to make the case for QE3, especially given the long-term inflationary dangers of creating new money.
Regardless of whether QE3 arrives or not, longer term the post-financial-crisis pattern for economies and stocks is likely to kick in: “years of sideways movement as the economy and financial system try to regain traction (with plenty of hope and disappointment along the way)”, says Authers. This is “the Age of the Crab”. It won’t end until we have completely shaken off the hangover from the credit bubble.