Escaping a double-dip recession

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Further to my post of yesterday, arguing that the world economy in general and the U.S. economy in particular will probably escape a double-dip recession, a short note from BCA Research arrived that essentially confirms my conclusion.

The relevant paragraphs from the report are quoted below.

1. The G7 economy will most likely settle onto a path of soggy growth with periodic threats of deflation. Of course, a premature withdrawal of fiscal support could inflict damage to the economic recovery process, and we are concerned that some G7 governments have misidentified the major problems afflicting the world economy by mistakenly tightening their fiscal belts.

2. Nonetheless, the current environment should not lead to a renewed contractionary period. There have been only two episodes of a double-dip recession in postwar history: one in the early 1970s and the other in the early 1980s. In both cases, it took very substantial negative shocks to bring about the second leg of the economic contraction.

3. In addition, corporate profit growth is very strong and the U.S. corporate-sector balance-sheet is improving. So long as profits stay solid and corporate balance sheets remain healthy, the odds are that a capital spending recovery should unfold.

4. Meanwhile, although U.S. consumers are still struggling, some progress has already been made in shedding excessive debt. The total liability of household-sector debt is now down about US$600 billion from the all-time high reached in 2008.

Source: BCA Research – Daily Insights Service, July 16, 2010.

BCA Research concludes: “The odds of a double-dip recession seem smaller than those of a continued, albeit sluggish, economic expansion in the major world economies.”

To what extent a muddle-through growth scenario in the U.S. and other mature economies will support equity valuations remains to be seen and argues in favor of allocating funds to faster-growing emerging markets.

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1 comment to Escaping a double-dip recession

  • Paul Sandison

    There are too many caveats here.

    Amazing how ‘stories’ are planted here, there and everywhere. Remember the ‘soft landing’ story for H2 2008? The ‘green shoots’ for H1 2009? The 4-5% recovery for H2 2009, then for H1 2010?

    The combined public and private debt in the US is between 400% and 800% of GDP, depending on what you want to include, and it is not getting smaller.
    I recommend David Walker’s ‘Comeback America’ to get a grip on how debt is moved off the balance sheets.

    Also there are too many geo-political cracks appearing. Whatever happened to worst-case analysis? Did it die with BP?

    Also, when emerging markets dip, they dip hard. Last time they dipped to +90% of the May 2007 highs.

    I remain totally unconvinced.

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