Some indicators of global growth are showing a loss of momentum, fuelling talk of a double dip back into recession.
But the AMP’s chief economist, Dr Shane Oliver says some loss of momentum was inevitable.
He argues that double dips are rare and apart from Europe there hasn’t been the sort of policy tightening that could drive a fall back into global recession.
Since April it seems the worry list for investors has expanded dramatically – with concerns about Europe, a hard landing in China, tougher bank regulation, a US housing sector relapse, tensions in Korea, the Middle East and Thailand, the oil spill in the Gulf of Mexico and the proposed Australian resources tax all weighing on investors.
Signs the global recovery may soon pass its fastest phase and is losing momentum have also led to concerns that we will soon see the dreaded “double dip” in global economic activity.
But how worrying is the emerging loss of momentum in global growth and what does it mean for investors?
Leading indicators losing momentum
Signs of a possible top are evident in a range of leading economic indicators:
The three month rate of change in the OECD’s leading indicators of economic activity for both OECD countries and for Brazil, Russia, India and China appear to have peaked. See the next chart.
Business conditions indicators in the US, Europe, Japan and China are showing signs of topping.
Even in Australia our leading indicator has rolled over reflecting in part weakness in business and consumer confidence and falls in building approvals.
Signs of a topping in growth momentum have arguably added to market jitters in the last two months.
Hard versus soft landing?
However, what matters is not the peak in growth momentum but whether the world settles into more sustainable growth or slides back into recession.
While growth indicators may be losing some momentum this is not necessarily a major concern.
First, some loss of momentum was inevitable.
Most growth indicators had reached extreme highs and if they continued to accelerate it would have been consistent with a boom/bust scenario.
Rather it is perfectly normal for growth to bounce strongly coming out of a recession or steep downturn as stimulus measures take hold and production is ramped up to meet better than feared demand and to then settle down into a pace more consistent with steady expansion.
This is particularly the case in China where growth became too strong into early this year prompting the authorities to move to slow it down.
This is now happening, suggesting the measures to bring the Chinese economy back under control are working and further aggressive tightening is unlikely.
This in turn adds to confidence that Chinese growth will settle down to around 9-10%, rather than have the hard landing that many fear.
Some moderation was also desirable in Australia and moreover some of the recent fall back in leading indicators for Australia owes to uncertainty generated by the proposed resources tax.
However, with interest rates likely to stay on hold for a while around long term average levels, some form of compromise over the resources tax looking highly likely and tax cuts and employment growth boosting household income, the growth outlook in Australia is likely to remain reasonable.
Second, fears of a double dip back into recession are common after all major recessions but the reality is that double dips are unusual.
If a double dip is defined as a fall back into recession within two years then the only US double dip in the last 85 years was in the early 1980s.
The dip back into recession or depression in the late 1930s in the US doesn’t really count as it followed several years of growth in 1934-36.
Third, the biggest threat is premature policy tightening.
This, via then Fed Chairman Paul Volker’s move to squeeze out inflation is what drove the US back into recession in 1982 after a brief recovery in 1981.
There is certainly a very high risk of this in Europe with Europe-wide fiscal tightening set to knock 1 to 1.5 percentage points off growth over the next few years.
Against this though, Germany is holding up well helped by a lower euro.
In addition, the euro-zone economies have contributed very little to global growth anyway over the last several years anyway.
The US economy is muddling along reasonably well helped by a stronger jobs market with absolutely no sign of premature tightening by either the Fed or the US Government and Japan, Asia and Brazil are all surprising on the upside.
Market jitters
Growth cycle transitions usually result in tougher periods for growth assets like shares and commodities.
A good example was 2004 when after a strong rally from the tech wreck lows in March 2003 to early 2004 major share markets had six to nine months of weakness as momentum in global leading economic indicators peaked and China and the US moved towards tightening.
In fact, Asian ex Japan shares had a 20% correction in April to May 2004 (see the next chart) on worries that global monetary tigh
