Where are we now with the ‘green shoots’?
Only a few weeks back there was a lot of excitement over the prospect that the recession might be over. Less so know.
Back in June the FT reported:
Martin Weale, director of the NIESR, said the recession had ended “as far as I can tell”. He added: “There has been much less downward momentum than we expected.”
This week however manufacturing data was weak:
The data led the National Institute for Economic and Social Research, a research body, to estimate that the economy contracted 0.4 per cent in the second quarter fafter a record 2.4 per cent collapse in the first.
Not as bad as the first quarter, but no actual growth. The FTSE, for what it’s worth, has fallen 8% over the past two weeks whilst oil has fallen from $72 to about $60 – a 16.5% drop. Gilt yields, which briefly traded above 4% last month are now once again at 3.6%.
As John Authers writes in today’s FT:
These developments are alarming. The pendulum in the debate between inflationists and deflationists has swung back to the deflationists – at a point that inflation still looks the lesser evil.
So – why the sudden bout of renewed pessimism?
News that U.S. employers shed nearly half a million jobs last month and the unemployment rate jumped to 9.5 percent, the highest in nearly 26 years, dampened recent hopes that the recession might be abating.
With US unemployment approaching double figures, inflation is at -1.3%. The third month of actual deflation. Worryingly the rate of deflation is accelerating. -0.4% in March, -0.7% in April and -1.3% in May. As recently as July last year inflation was +5.6%.
What does this all mean?
It means we’re not out the woods yet. Not by a long shot.
I find myself agreeing with monetarist Tim Congdon who writes today that:
If M4 growth shows signs of slipping beneath the 5 per cent number, the Bank should have no hesitation in expanding its gilt purchases. The priority must be to ensure that the quantity of money continues to rise, so keeping the menace of deflation at bay.
The Eurozone, the US, Switzerland, Sweden, Japan, China, Taiwan & Thailand are now all actually experiencing deflation. Canada (inflation +0.1%) is on the brink. The UK stands alone amongst major economies in so far avoiding it through a combination of sterling’s fall and quantative easing.
Now is not the time to be talking about withdrawing the fiscal or monetary stimulus.