the great depression


Sustainable economic growth is not the thing which global community must expect. This is the opinion of the latest Fulcrum Asset Management, a one billion hedge fund.
(The previous article can be found here Fulcrum: Euro Bailouts Could Cost Another $2 Trillion)

The global economy, which was slightly recovering after the crisis, is not giving reasons for any optimism. At the short term the slight recession is observed, but in long terms even the modest recovery seems to sound risky.

But the question still is if the slowdown is just  temporary?

The business surveys are not optimistic. The global PMI/ISM index has decreased by 1.7 points in manufacturing and 1.9 points in non manufacturing. This information can be used as early indicator of global perspectives. Annual GDP should run at 1%, the lowest rate since the great depression.

It should be also noted that the central banks decided to came back into the game, the Fed was  and the ECB were first, then the Bank of China, and then the Bank of England followed it with monetary easing.  If the central bank’s activities were effective now as they were previously, they still could not help the weaknesses on the demand side.

The US economy is now facing the same problems as the Chinese and European ones, and global orders are falling rapidly. Even the positive issues in regulating of the inventory cycle don’t mean that the stock cycle will come into order in a short period of time.

Leading Economic Indicators are bleak. They show the strong weakening signal and negative changes of market cycle. For example, the Goldman Sachs Global Leading Indicator is declining rapidly over the past few months.

The economic weakening in the middle of the year was also observed in 2010 and 2011 and this tendency must be taken into consideration but in the strategic view we see that global recession from 2009 to 2011 is not a sustainable process. Short periods of growth don’t cove the overall tendency of instability and decline.

In these conditions, fiscal consolidation and QE combination seem to be the way to support the aggregate demand, at least for some professionals. These actions may involve officials from the developed countries and force them to do some steps. The UK shows a good example of how central bank and treasury balance can influence lending and investments to infrastructure.

On the other hand, the situation with global supply is not as obvious as with the demand and the discussions are made about structural unemployment, sustainability of government debt in the US, and structural weaknesses of EU.

And, for sure, the main issues of supply are the prices. First of all, the oil prices. High oil prices have induced inflation and hampered economic growth. At the moment the prices are not growing rapidly and economy may be demonstrating some positive trends in future, but in a long term competition for scarce resources will become harder.