HAMISH MCRAE: A dip now beats a crash later


There is a general rule in finance that things take longer to happen than you would expect, but when they do, they happen more violently. And so it is with the next global downturn.

Everyone worries about it, for we all know there is an economic cycle. It would be nice if we could get rid of ‘boom and bust’, as Gordon Brown thought he had as Chancellor, but we can’t.

For investors, a downturn in America – so often a bellwether for the global economy – is not yet in sight. 

For investors, a downturn in America – so often a bellwether for the global economy – is not yet in sight

For investors, a downturn in America – so often a bellwether for the global economy – is not yet in sight

The US stock market last week hit a new all-time high with the Standard & Poor’s 500 index briefly going over 3,000.

For UK investors, the picture is more clouded for obvious reasons: uncertainty about Brexit and fear of a Corbyn government. 

Yet, despite UK assets being deeply unfashionable, the FTSE 100 index is within 4 per cent of the all-time peak it hit last year.

It is easy to see what is pushing shares up: the willingness of central banks to keep pumping out money. 

Last week’s testimony to Congress by Jay Powell, chairman of the US Federal Reserve, confirmed that the Fed would keep credit flowing, and the markets expect a cut in interest rates later this month.

The European Central Bank is expected to keep the taps open too. And in the Bank of England has leeway to cut rates if needed.

But if it is easy to see what is pushing shares up, it is harder to judge what might pull them – and the economy – down. In the past, it has often been a sudden rise in inflation, driven by higher oil and raw material prices. Remember the so-called oil shocks?

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Sometimes it has been wage inflation, with tight job markets leading to people demanding, and getting, higher pay.

But neither of those looks likely now. Encouragingly, joblessness is at its lowest level since the 1970s in the UK and US, despite signs of pay pressures. Maybe unemployment can go lower still.

There could be a financial bubble, such as the dotcom boom of the late 1990s, or the boom in sub-prime lending that collapsed in 2008. 

Or a downturn could simply be triggered by bad economic policies. The trade war rumblings between the US and China, and maybe soon between the US and EU, cannot help.

Ultimately, though, while it would be great to pinpoint the key issue that will send us into a global recession, we have to honest and admit we can’t.

We can see warning signs, such as weak demand for UK jobs, as we report on page 12. And we can make a best guess – my own is for a not-too-serious global downturn starting next year.

But of this I am sure: the longer the downturn is delayed and the more global asset prices are pumped up to keep things moving, the harder the bump when we fall. Better to have a small recession in 2020 than a humdinger in 2022.

New car sales are the best immediate indicator of consumer confidence. Not only are they the biggest big-ticket item people buy, but also we can probably hang on to the old car if we are worried about our finances.

So look at this. Car sales in China, the world’s biggest market, are down 14 per cent in the first six months of this year compared with the same period last year.

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In India, until recently the fastest-growing large market, they are running down 25 per cent year-on-year. 

And globally, according to Germany’s Centre for Automotive Research, they are likely to be down 4 million, the largest fall since 2008. 

UK car sales are down ‘only’ 3.4 per cent in the first half of this year.

If you are in the motor trade this is a disaster. There are stories of desperate dealers in China offering BOGOFs – buy one, get one free – a supermarket trick to bump up sales. But from global perspective, well, maybe the downturn noted above is gathering pace.

We should always be careful of political scare stories, but the first evidence of damage to the economy from fears of a Corbyn government came last week.

The £2 billion sale of Electricity North West, which delivers electricity and gas across the UK, was abandoned. 

The reason: Labour renationalisation plans. If you say you will nationalise companies without full compensation, don’t expect investors to knock at your door.



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