The Coming Smörgåsbord Recession?

Stockholm (Ekonamik) – In a recent discussion of the future of the US economy, 2008 Nobel Laureate Paul Krugman argued that should a downturn be around the corner, it will be a smörgåsbord recession.

“Short Run economic forecasting is a black art – nobody does it very well.” Krugman cautioned. “For what it’s worth people who are tracking it are feeling moderately depressed right now. They are seeing slow growth and bond markets are acting as if there is going to be a recession next year or so. China is clearly struggling, Europe may very well already be in a recession; we are probably also suffering the deflation of the tech bubble. There is no one thing. If we are going to have a recession, it is going to be a smörgåsbord recession.”

With regards to recent economic growth, the laureate commented that “what we have been seeing is in the normal range of fluctuations,” before discussing the recent slow pace of wage growth in the USA.

Consistent with a short comment in Krugman’s statement, recent reports from the Financial Times and Bloomberg have also highlighted the risks to the US economy from ballooning corporate debt worth US$ 747 billion, globally. Even the IMF, in its recent World Economic Outlook report highlighted the issue. “The US credit cycle is at an advanced stage, with a rising share of lower-rated issuers in the corporate bond market and a growing volume of covenant-lite loans extended to highly indebted companies that offer limited protection for investors in the event of a default,” commented the international organisation.

The notion of a “smörgåsbord recession” echoes the analysis of Eric Lascelles, Chief Economist at RBC Global Asset Management, who earlier this year presented a Scoreboard of US Economy that suggested it was in the later part its business cycle.

In his latest review of economic conditions, the economist was slightly more optimistic. “Green shoots continue to appear in the global economy. (…) Financial conditions have indisputably eased now that central banks have staged a retreat.” Moreover, the Chinese contribution to world growth is stabilising, and the fiscal stimulus provided by the 2018 Trump tax cuts are fading away. “A fair portion of the growth deceleration represented a retreat from an unsustainably fast clip. This meant that growth should slow somewhat, not that it needed to decline indefinitely.”

“All of this said, we continue to expect less growth on the aggregate for 2019 than in 2018, and a further slight deceleration into 2020. Do not forget that protectionism remains a drag, U.S. fiscal support is vanishing, and the prior growth rate was unnaturally fast. The business cycle is also late, pointing to risks that skew to the downside,” concluded the Canadian economist.

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