Our Managers
Nicholas Carn
Partner | Head of Investment Strategy
Current Outlook
Global economic growth is decelerating and leading indicators suggest that there is more to come. Of course a deceleration doesn't necessarily presage a return to recession, it might just imply settling to a lower level of growth. What has gone, however, is the present certainty that there will be no double dip - obviously while growth momentum is increasing that is an impossibility. The ECRI leading indicator, for example, now implies a contracting US economy in H2. The story here is that the market based components, credit spreads, treasury yields and the stock market now signal renewed recession - the "real economy" components are more upbeat. This is a dilemma. On the one hand it makes little sense for the stock market to be afraid of its own reflection, on the other it was a big mistake [made by almost all policy makers in the run up to the credit crisis] to treat financial conditions as external to the real economy; it's been pretty clear for years that in 21st century economics it's "wag the dog". My own best guess is that we will have weak but positive growth with periodic intervention [e.g. more QE] proving necessary to hold the system together and an investment environment that generally favours current yield but is punctuated by rapid rallies in risk assets as soon as conditions appear to have stabilised and a zero return on risk free assets suddenly seems unattractive.
The situation in Euroland is the worst in the rich world - thanks to EMU. EMU created the conditions for the biggest credit bubble of all. Markets, urged on by the Europols and by their professional propagandists in Brussels, swallowed the idea that Euroland was already a unitary state. If this were true it followed that Euroland sovereign bond markets would be free from both default risk and currency risk. Markets were happy to proceed on that basis even 'though the Maastricht treaty makes it absolutely clear that this is not the case. The Greek crisis was the beginning of a rude awakening.
As soon as the idea that Euroland is a sworn confraternity is exposed as wishful thinking then the weaknesses of its institutional arrangements become clear - not least the lack of tax raising powers at the Federal level. No wonder the spotlight moved from Brussels to Berlin as soon as the issue became money rather than ideology. If there is no such thing as Euroland but rather a number of competing factional interests [e.g. German taxpayers and Greek pensioners] then it is no longer clear in whose interests Euroland institutions such as the ECB will [or should] act. This is where we are at the moment. The ECB is not going to attempt to pre-empt the next political shift in Euroland - to anticipate it wrongly would pose an existential threat to the ECB itself. So it adheres as closely as possible to the strictest interpretation of its mandate - a beleaguered bureaucracy has little interest in wider outcomes, the main object is to avoid blame. Amongst the many ironies of the present crisis is that Germany, Europe's biggest economy, is doing really well, at least for the moment. Business confidence is high and employment is now growing again.
30th June 2010.
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