Duncan’s Economic Blog

Economic Base Case

Posted in Uncategorized by duncanseconomicblog on July 31, 2009

I’ve been very busy for the last few days at work.

 Hopefully normal service will return next week but in the meantime, I take the following bullet points from our latest presentation to investors at work. 

I generally try to avoid making precise economic forecasts – it’s a way of making oneself look silly. But this represents my ‘base case’ on the economy for the next few years. What I think is likely to happen, rather than what I desire to happen. 

  • The worst quarterly declines in GDP are behind us.
  • Extraordinary fiscal & monetary policies have hopefully prevented a prolonged deflationary slide.
  • Global growth will come from inventory re-stocking in the West and consumption/investment in the East.
  • Capacity utilisation is at record lows, and still falling in Europe, the UK and the US – hence inflation is unlikely.
  • Private sector capital expenditure is extremely weak.
  • Fiscal policy expansion stop by late 2010/11, given large budget deficits and debt/GDP ratios and political pressure.
  • Deleveraging by banks, companies and consumers is only just beginning. Corporate and household debt levels will fall and savings rates rise.
  • Once the fiscal policy stimulus is withdraw, and the inventory restocking complete, the West is likely to dip back into recession by 2011.
  • Bear Case: If deflation becomes more deeply entrenched (still a risk), then the (Anglo-Saxon)West faces a ‘balance sheet recession’ and a Japanese style ‘Lost Decade’.
  • Bull Case: A strong upsurge in corporate investment could cause private sector GDP to start growing before the stimulus is withdrawn.

One Response

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  1. newmania said, on August 3, 2009 at 12:00 am

    Global growth will come from inventory re-stocking in the West

    I wonder if this means anything ? .Growth is not more of the same it arises from increased productivity which means doing something better , quicker but above all differently , that means we do not know what it might be . Resquiat in pace the economist as soothsayer .
    Economists failed , to predict , for example , the extraordinary golden period growth of Japan , an ice berg sized obstacle ,as well as our current tribulations . In addition such people ( The Duncans ) are likely to describe the voyage of the Titanic as over 8000 miles of trouble free cruising , if it sells the snake oil . In practice that means emphasising the key role of planning on the economy without which you need a lot less economists ( hence the leftists and managerialist bias of the priesthood ).
    Investment is unlikely to pick up when we are hanging from sky hooks created by risky demand management . Put it this way , interest rates are very very low but would you take out a huge mortgage now ? I think not. Real growth then is now being harmed by a policy which is quite obviously timed around the GE

    My own suspicion gleaned from tea leaves and intestinal prompting is that this country has developed a systemic sclerosis . An inflexible and abysmally educated Labour force ( more money to teachers clearly not the answer ) a class of parasites in the state`s employ and an impossibly over regulated business environment which sends resources into worn grooves and away from sunrise industries . This is especially true of manufacturing and technology and , to my shame, I do wonder about some from of intervention to allow stability whereby investment over a. longer period is possible . I cannot see these problem being solved without an old style punch up.
    Still for all I know you are spot on , where you are less well informed IMHO is in the likely consequences of arresting the fiscal free fall. I seriously doubt whether there are any taxes to be got and a high tax environment s in any case about the best idea anyone could come up with for pushing us into a new dark age. We cannot realistically neglect unemployment and this means offering ordinary working people a deal they will not take . Higher taxes for even less than the pitiful pay back even now resented and I cannot see it being possible . I noticed Peter Wilby , arguing that debt here was fine after all we get three times our income as a mortgage surely the state can do better jeez look at Japan etc.( The post war growth supernova and unique economic event that has become the lefts go to for UK analysis….yeeesh ). That would be fine if the state had any money , it does not . It all belongs to people living in its borders who may or may not cough up . Not , is my guess .

    There is another problem , it is possible that a high risk money printing debt acquiring strategy might come off . As I said we do not know and perhaps astonishing growth will arrive from the ether which with a bit of inflation will massage us back into viability . It is equally likely there is an unseen supply shock around the corner , a war , a worsening of conditions in Oil producing areas , Russia goes nuts , a nuke from the Infidel . What then Duncan ? My Dark ages name will be Blood Axe Newmania I the filthy pervert , Bring it on.

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