Double-dip fears recede, outlook still lousy

Fears that the world economy may slide into a double-dip recession appeared to have subsided in the past fortnight as global financial markets absorbed the shocks of the first ever downgrade of United States government debt.

For the moment at least, expectations by investors that credit markets would have gone haywire have not been realised and this has put a brake on the flight of capital seeking safe haven.

The apparent lessening of volatility is also due, in part, to signals by European governments and the central bank that further measures are being taken to ease the debt crunch of vulnerable member countries.

Jamaica's economy is not, however, likely to experience marked improvement in the external environment in the short term as the real economy in Europe and the US has weakened.

In the Eurozone, the world's largest economic zone, leading indicators of activity in the real economy such as manufacturing output have deteriorated.

Surveys of consumer and business in the region have also shown waning confidence.

Notwithstanding data released earlier this week indicating that in July US consumer spending posted the largest increase in five months, other key indicators continue to show that the economic recovery there remains lacklustre.

To start with, US economic growth for the first half of 2011 is now estimated at 0.8 per cent after the second- and first-quarter figures were revised downwards significantly.

This is after preliminary figures put the rate at around 1.5 per cent and compared with official projections that output would have increased by over 2.5 per cent for the period.

The most potent sign that recessionary conditions persist in the US is the weak state of the labour market with nearly 14 million out of work as the unemployment rate has been stuck around 9.1 per cent since April.

The prospects for substantial improvement appear weak based on the slowdown in the rate at which new jobs are being created in the private sector and the high level of job losses in state and local government.

Since the beginning of 2011, the number of new jobs created monthly has been averaging less than 100,000, or half the number needed to keep up with population growth.

A consequence of the slump in the US job market is that incomes are stagnating with employers making cuts in costs to compensate for sluggish revenue growth.

This combination of high unemployment and depressed incomes is one of the root causes of the lack of consumer demand. And since consumer spending is responsible for two-thirds of US GDP growth, then the high rate of joblessness is ultimately a critical factor responsible for the slow rate of economic growth.

In addition to the debilitating effect of the weak labour market, consumer demand has also been depressed by the overwhelmingly high level of US household debt that was accumulated by the time of the financial crisis and the recession.

By 2008, the household debt-to-GDP ratio had reached nearly 100 per cent, far exceeding levels seen in typical recessions. Indeed, in the 1982 recession the ratio stood at only 45 per cent.

Consumers could, therefore, boost spending by increasing borrowing, but that capacity is far less now with the ratio still standing at around 90 per cent.

There is the related matter, too, of the collapse of housing prices consequent on the bursting of the housing bubble. US housing home prices are currently 32 per cent below the peak levels of 2006.

This represents a massive loss of wealth for many Americans for whom their home is the major asset and, hence, their main collateral. With US consumers being buffeted by this combination of factors, household spending is not going to provide the push that the US economy needs to speed up the recovery.

business@gleanerjm.com