We Have Moved!

It has come to our attention that there are a number of lists of Futurist’s Blogs that have been posted on various sites that give this address for our Blog. That was true up to the end of 2012. From 2013 onwards, we are posting entries to our Blog through our web site, which can be accessed at:

http://www.eufo.org/the-futurist-blog.html

The Blog also contains a full list of our contributors. Anyone who claims a connection with our Blog, either implicitly or explicitly does so without our consent.

Stephen Aguilar-Millan

© The European Futures Observatory 2013

How Deep Are A Gnome’s Pockets?

Harold Wilson once famously railed against Swiss bankers – who he dubbed the ‘Gnomes of Zurich’ – when he felt that they were unfairly driving down the value of the Pound. How things have changed. Bankers other than the Swiss variety have recently been depositing their funds in Swiss Francs as a result of the uncertainty over the Euro and the US Dollar. The Swiss Franc has been seen as a ‘safe haven’ currency, which attracts large volumes of liquid funds when the financial environment seems excessively risky. The result of this has been to drive up the value of the Swiss Franc, causing the Swiss Central Bank to worry about the deflationary and recessionary consequences of a general deflation.

What to do? The traditional response would be to reduce interest rates, to make the Swiss Franc less attractive to overseas investors. The problem is that Swiss interest rates are, like those elsewhere, virtually at rock bottom. If the Swiss authorities could persuade others to raise their interest rates, then Swiss rates could fall in relative terms. The problem is that there is no great appetite for to help Switzerland in the international community. Other nations feel that they have who have too many problems of their own to co-operate with Switzerland.

That leaves managing the external rate of the Franc as the only option open to the Swiss authorities. The only tool that they have are open market interventions. If Switzerland had a regime of strict exchange controls, then managing the external rate would be much easier. It would also destroy the Swiss banking industry, which relies upon funds freely flowing into their coffers. Market intervention is a costly business. It is reported that the Swiss National Bank (SNB) has lost SwFr 10 bn already this year on defending the currency. Now that the markets sense a vulnerability – one that is possibly unsustainable – there is an incentive to bet against the Swiss Franc until the SNB runs out of money.

It is at this point that we shall see exactly how deep are the pockets of a gnome.

© The European Futures Observatory 2011

Switzerland abandons floating exchange rate in dramatic 'currency war' twist

Swiss move to make its safe-haven less attractive

Swiss gloves come off in battle over value of franc

The Output Gap In Pictures

This is a really useful chart because it shows a comparative estimate of the output gaps of various countries. In a previous post, we calculated the US Output Gap to be about 10%. Interestingly enough, this is a figure that The Economist has independently arrived at. What is of concern is the UK Output Gap, which is estimated at about 13%. We feel that this is a bit high, not because economic activity is greater than estimated, but because we feel that economic potential has been severely eroded by the recession.

To be frank, what we mean is that there are now youngsters who will never work because they haven’t developed the habit of working in their formative years. This is the human cost of recession – blighted lives. It is a legacy that far too many politicians forget about until social turbulence moves from being an abstract concept to being disorder on the streets.

© The European Futures Observatory 2011

http://eufo.blogspot.com/2011/08/risk-of-inflation.html

http://www.economist.com/node/21526392

The Risk Of Inflation

How close are we to seeing a bout of prolonged inflation in the US? This might seem an idle question, but it is one that has quite important consequences for the US economy in the medium term. The Federal Reserve has, over the past couple of years, undertaken a major monetary expansion to support the US financial sector. It has done so though a policy of historically low interest rates - which it has signalled will continue to 2013 - and a policy of quantitative easing - which has injected about $2.3 trn into the economy. To those of the monetarist persuasion, a roaring inflation is just around the corner.

This might not be the case. A monetary expansion might be a necessary condition for an inflation, but it is not a sufficient condition on its own. A monetary expansion also has to work with a combination of the right supply and demand conditions to produce an inflation. For us, the key question is whether or not those conditions prevail at the moment. There is no doubt that prices are rising on the supply side. In particular, food prices, heating costs, and transportation costs are pushing up prices on the supply side. And yet this cost push is not igniting the flames of an inflation on the demand side. Rather than seek higher wage settlements, consumers are accepting a reduction in their living standards instead. This is because a sluggish economy has had the effect of dampening down demand for goods and services. Companies are absorbing rising input costs for fear that end user price rises would drive away their customers.

In terms of economics, we are seeing a muted demand response to the monetary expansion owing to the size of the ‘output gap’. The output gap is the difference between what GDP currently is and what GDP could have been if the recession had not occurred. Using US Bureau of Economic Analysis figures (which are expressed in 2005 constant dollars), we estimate the output gap to be in the region of $1.5 trn. This is probably an overstatement of the gap because the recession is likely to have forced a number of economic participants out of the jobs market completely. Put another way, it implies that the US economy could grow up to about 10% this year before experiencing a profound number of inflationary pressures.

Of course, the risk of inflation might be low now, but it does remain in the medium term. Should the US economy return to anything like the trend growth path, then prices will harden and wage settlements are likely to start to creep up. We expect that the US politicians will allow inflation to take hold for a while. After all, the two ways to reduce the impact of the US Federal debt pile are economic growth and inflation. If the two are combined at the same time, then so much the better. However, it is easier to start a prairie fire than to put it out, and the prospect of an inflation being created deliberately for a short term gain may well come to be seen as politically irresponsible. For the moment, though, the risk of inflation seems to be quite low.

© The European Futures Observatory 2011

Timeo Danaos … And All That

China has started the year with a charm offensive across Europe and the US. In Europe, the Chinese were placing orders with exporters and their central bank was mopping up Euro-bonds in the Portuguese and Spanish bond auctions. This has led to speculation that China will be the engine that draws Europe out of recession whilst it props up the Euro with its bond purchases. Time will tell if this is right.

In the US the story is slightly different. China has placed itself as an engine of growth, China still likes to buy US bonds to help lower US interest rates, but it also seeks to reassure Washington that its rise should not be seen as threatening in the west Pacific. There are parts of this story where the rhetoric is different to the actions that the Chinese government has undertaken. A key issue that is looming is to find a permanent settlement for the Korean peninsula.

Many futurists take the continued rise of China as axiomatic. We are a little bit more sceptical of the conventional wisdom. This week, three pieces of the jig-saw fell into place. It appears that, in 2010, China attracted record levels of inward investment. Much of that investment was originated in funds seeking returns higher than those prevailing in Europe and the US. Of these inflows, one fifth were destined for the Chinese property market.

Cue the next piece of the jig-saw. It appears that Chinese property prices continue to rise. This looks very much like a dangerous property bubble taking form. The Chinese government has reacted by raising interest rates and by raising the reserve requirements of its banks, but with the flow of hot money flooding in, can it really stem the flow without adjusting the exchange rate? The government has ruled out an important policy tool at just the wrong time.

And this leads to the final piece – China is still inflating at too rapid a rate. Although the headline inflation rate is slowing, the core drivers of inflation – mainly food prices, fuel prices, and commodity prices – continue to rise. Once again, the Chinese government has refrained from dealing with this problem through an exchange rate adjustment. And this is where we get excited from a futures perspective – is this the beginning of the end of the Chinese titan?

Will the mighty China be humbled by a runaway inflation exacerbated by a bursting property bubble? It is certainly a scenario worth exploring.

© The European Futures Observatory 2011
BBC News - China attracts record foreign investment in 2010
BBC News - China's property prices still increasing
BBC News - Chinese consumer price inflation 'down to 4.6%'

The Pace Quickens

We are all starting to feel the impact of China on our daily lives. For example, the ‘China Price’ is rising, which means that we are feeling its effect in falling disposable incomes (through higher inflation). It does not mean, however, that all is lost. One beneficial effect of the China effect is that the government of China can now look to Europe for investments and purchases. Purchases help European exports, but, more significantly, Chinese investments are providing a prop to the Euro at just the time that it is needed.

Of course, good news for Europe is bad news for the US. As Euro denominated bonds become the choice of Chinese investors, so they are moving away from investments denominated in US Dollars. This will give the fed a refinancing headache in the near future. As it does so, the geopolitical decline of the US will be shown in a more stark light, counterbalanced by the stark rise of China.

To this extent, the pace of change will appear to quicken.

© The European Futures Observatory 2011
BBC News - China's Hu Jintao: Currency system is 'product of past'
Charlemagne: Mr China goes shopping | The Economist

Mr Bernanke’s Gamble

Events are unfolding that could lead us interesting times. The US corollary to Mr Osborne’s gamble is a gamble by Mr Bernanke – of equal intent, but with far greater magnitude – to kick start the American economy. This is something of an untried experiment, to combine fiscal tightening with monetary easing in order to fine tune the economy, and we have yet to see how well it will go. There is a real danger of diminishing returns (QE2 will yield less stimulus per £ or $ injected) that may render the medicine unhelpful. More fiscal stimulus would do the trick, but there is little appetite for this at present.

The fears of QE2 inducing a bout of inflation still seem to be far fetched. That could be an effect, but the output gap is absolutely huge in the US. Economists might talk about the ‘output gap’ in an impersonal way, but in the US, ‘output gap’ means people living in cars, people without healthcare, people who have to give up their education. Perhaps economists, who are in no position to talk about moral hazard, ought to give some thought to the consequences of their trade a bit more?

© The European Futures Observatory 2010

America's economy: Not by monetary policy alone | The Economist

A Bit Of Clarity

We have received a number of requests to clarify and expand upon a point made in our last update. In it we said that “the US stock of debt has a half life of just over 4 years and a coupon of just under 6%, which suggests a very pressing issue for the 2016 US Presidential Election”. We have been asked to explain exactly what that means and what chain of events might be triggered out to 2016.

To understand this, we need to start with the nature of public sector debt. Although an individual loan instrument has a fixed term, it would be wrong to think of public sector debt as fixed in nature. Because treasuries around the world issue a number of instruments with varying maturity dates at different times, public sector debt is a lot more fluid than we might think it to be. In many cases, the debt is revolving, which means that new debt is issued to repay old debt as it falls due. This is quite normal. Public sector debt is less like a mortgage – a single loan of fixed term used to purchase a big ticket item – than it is an overdraft – a series of lending and repayment events used to smooth out cash flow fluctuations.

At any one point in time, the US Treasury will be issuing new debt instruments, of varying repayment maturities, and either spending that money on fiscal expenditures or using that money to repay old debt. The balance between debt repayment and making fiscal expenditures is largely determined by the size of the fiscal deficit – the extent to which taxes are insufficient to meet expenditure obligations. As deficits grow there is greater pressure to delay the repayment of debt and to allow the total amount owed to increase.

However, the total amount owed cannot increase without check for two reasons. First, because the total debt is a collection of loans for fixed terms, the time profile may well be very uneven. If so, then there comes a point where the total amount borrowed (i.e. the debt repayment that cannot be avoided plus the size of the fiscal deficit) exceeds the willingness of the bond markets to lend to the government. This brings in the second constraint. As we are currently witnessing for Greece, the willingness of the bond markets to lend to a government is partly determined by it’s credit rating and partly determined by the price at which the government is prepared to borrow. These two reasons are why the time profile of the debt and its coupon (i.e. price) are very important.

We measure the time profile of the debt in terms of its half life. This is the period of time in which 50% of the total amount owed falls due for recycling. A short half life combined with a large fiscal deficit implies that the government has a real problem in its immediate future, which will only be solved by drastic reductions in its fiscal deficit (this means emergency and severe spending cuts followed by steep tax increases, as in the case of Ireland) or by the cost of borrowing rising disproportionately (as has happened with Greece, along with the consequential downgrading of Greek debt by the credit ratings agencies). In both cases, the remedial action is likely to be sufficient to trigger a major political crisis.

Bearing this in mind, it is worth using this framework in the case of the USA. The USA has a very short half life for its debt. At 4 years, it is one of the shortest repayment profiles in the OECD. The American fiscal deficit (both Federal and State deficits combined, if we are to compare like with like) is relatively large (11.1% of GDP in 2010 according to the EIU) compared to other OECD nations. In the absence of a strategy to alter this state of affairs, this would suggest that a refinancing crisis could emerge somewhere towards the middle of this decade. The crisis is likely to occur after the 2012 Presidential Election, but could well become a major factor in the 2016 Presidential Election.

There are two aspects to this problem – the savings glut in the global economy and the savings shortage in the US economy. One solution would be for the US economy to save more. To date, the household sector in America has been reluctant to save. Experience elsewhere in the world suggests that if the household sector will not save, then the public sector must do it for them through higher taxation. There is every expectation that this will become a pressing issue in the 2016 Presidential Election, simply because resolving the question of the fiscal deficit is likely to become very pressing.

Of course, raising taxes is not a popular policy, particularly in America, but then, as we said before, the remedial action is likely to be sufficient to trigger a major political crisis.

© The European Futures Observatory 2010

Has Icarus Landed?

Those who have been following the tale of the Icarus Economies (see previous post) will be familiar with the view that the economies that have risen the highest and the fastest in recent years have been subject to some of the largest falls. The latest chart from The Economist (see article) suggests that Icarus has stopped falling and finally has landed. The question now is the degree to which Icarus has experienced a hard landing.

Looking at the chart, it would appear that the growth in industrial production in the three Baltic Economies has fallen from a band of 5%-10% pa to falls of 20%-30%. This is a large fall and suggests that Icarus has taken a hard landing. hat does that mean?

The significance of these falls will be felt in Europe. The Baltic economies are pegged to the Euro and supported by European institutions. In order to recover from this fall, reform is needed in the Baltic Economies. And yet, economic reform is politically unpalatable. If reform is not undertaken, then the Baltic Economies have the capacity to deteriorate further (Icarus keeps falling). If reform is undertaken, then there is the risk of the political destabilisation of the Baltic.

This would matter because the Baltic States are members of the EU (perhaps their entry in 2004 was a bit premature?), members of NATO (was this a sound expansion policy?) and have borders with Russia. This is where the problem might come in the future. An expansionist Russia looking to restore its sphere of influence in Eastern Europe would see the Baltic States as a prime object. The only way to counter this is to keep up the flow of Euros supporting the Baltic Economies. Is there the political will in the EU to do this?

The Poodle And The Butcher

Following on from our recent post about relations between Britain and the US (see post), it seems that matters are about to come to a head. It is speculated that a Pentagon report will shortly circulated that suggests that the current US military strategy is ‘not working’ (see report). It is also speculated that the answer, according to the US military, is to send a further 20,000 NATO troops to Afghanistan (see report). This, of course, raises the vexed question of exactly who is to send these additional troops.

America is the first port of call. As the US presence in Iraq is wound down, the Pentagon may have the capacity to increase its presence in Afghanistan. The problem is that the US public is falling out of love with the Afghan adventure. A recent survey in The Economist (see survey) reports that 42% of Americans believe that the US is not winning the war in Afghanistan (as opposed to just 18% who believe that the US is winning the war), 41% oppose increasing the number of troops in Afghanistan (as opposed to 32% who are in favour of doing so), and 65% believe that the US will eventually withdraw from Afghanistan without winning the war (as opposed to 35% who believe that the US will win the war).

This creates a dilemma for President Obama. He is locked into the policy of increasing the number of troops in country because, at present, he cannot contemplate an American withdrawal from Afghanistan. Sadly, he is backing a set of Afghan allies – irrespective of who wins the recent election - who are not currently up to the job of providing their own security. This implies that America will be the first port of call for reinforcements for some time to come. Unless he can engage the rest of the world community in accepting the mission, which is where NATO comes into the picture.

Contrary to popular belief, the current mission in Afghanistan is not an American mission, it is a NATO mission. The US currently supplies 46% of the troops in country (see data). The second largest national contributor is the UK, with 14% of the troops. The total contribution from the EU nations (including the UK) is 43%, marginally less than that of the US. This suggests that the second port of call for reinforcements is Europe. Of the five largest European contributors, Germany (6% of the force total), France (5% of the force total), Italy (4% of the force total), and Poland (3% of the force total) are all likely to cite their own problems in deploying more troops.

Of the top five European contributors, only the UK has the capacity and willingness to increase their deployment. The recent increase in the numbers of British troops in Afghanistan highlighted the tensions over further deployments. The Foreign Office wanted to commit a further 2,000 troops. The Treasury stated that we could only afford 750. The military felt that 750 troops adequately resourced would be better than 2,000 troops inadequately resourced and sided with the Treasury. Against this conversation, the public didn’t really have too much of a view.

And this is the point where the issues of the NHS and the Lockerbie Bomber assume importance. The war in Afghanistan is starting to become unpopular in the UK. For example, in Helmand Province, 10 British soldiers died to allow a population of 80,000 Afghans have the opportunity to vote in the recent election. That only 150 Afghans actually voted is seen in the UK as not good enough (see report). This is not a good time for Gordon Brown to commit more troops to that operation – particularly in the face of an oncoming General Election – to what is seen as an American folly because the US is politically unpopular in the UK at the moment.

If President Obama has any political savvy, he will not ask for more troops from the UK for fear of being rejected. However, that may create problems for him at home. Perhaps our previous Obamascepticism was well placed?

Poodle Snaps At Owner

In a recent post we wrote about how the British poodle was starting to bite at it’s American owner (see post). In the post, we touched upon the case of Mr Megrahi – the Lockerbie bomber and his imminent release from prison on compassionate grounds. It was announced today that Mr Megrahi would be released and allowed to return to Libya to die with his family (see story). There is so much in here that it is worth unbundling the story in order to take stock.

In recent days, there has been a great deal of diplomatic pressure from the US not to take this decision. The White House had called for Mr Megrahi to serve his sentence, until death, in a Scottish prison. The statement was reinforced by a personal appeal from Hillary Clinton for Mr Megrahi to stay in Scotland. That the Scottish Justice Secretary decided to pay no regard to these appeals suggest that – whilst there may be no intention of a snub to the US – the Scottish politicians are not perturbed by the discomfort of the American politicians. As such, it signifies a major change of attitude towards the US.

It will be interesting to see how the US government responds to this decision. Regret has already been expressed, but will it go beyond that? It would not be in the interest of America to take matters too much further for two reasons. First, things are not going well for the US military in Iraq and Afghanistan. There has been an uptick in violence in Iraq, which always has the attendant risk of spiralling out of control. Will the US troops have to come out of their barracks again? Will the withdrawal from Iraq have to be delayed? These are two issues on President Obama’s agenda at present.

In Afghanistan things are not going well. Turnout for the elections is reported as being low (see report), which suggests that the Taliban might say that they have won the election. The mission could well take far longer than expected, which puts President Obama in a position where he needs to ask for greater support from the European allies. The question that he currently faces is whether or not he would want to jeopardise this support by taking up the case of the families of the victims of the Lockerbie bomber.

The second reason why President Obama might be a bit loathe to race to action is money. Not only is he short of manpower, he is also short of cash. The Federal deficit is at record levels and rising. Interestingly enough, the UK is the third largest purchaser of US Federal Debt - behind China and Japan - with all of the economic vulnerabilities that implies. It is difficult to believe that President Obama would be prepared to risk a run on the dollar for a relatively minor incident.

In an exchange of private correspondence after my last post on this issue, one of my correspondents stated that ‘the UK needs the US more than the US needs the UK’. I wonder if that is really the case. Under the Bush administration, France suffered no great disadvantages from being hostile to the US and Britain enjoyed few favours from being America’s friend in Europe. This may not have changed in the new administration. If so, then we may be witnessing a realignment of the UK away from the US and towards the EU.

Only time will tell.

The First Signs Of A Double Dip?

The July unemployment figures are something of a mixed bag. On the one hand, unemployment rose by only 24,900. This is not good for those who have been made jobless, but it does suggest that the forecasts of 3 million unemployed this year belong more and more to the realms of fantasy. On the other hand, if we accept our crude rule of thumb from last month (see post), we would have expected unemployment to rise by only 10,000 to 11,000. This deviation from trend is not insignificant, and demands our attention.

It is entirely possible that there are seasonal factors affecting this figure. In July, somewhere between 400,000 and 450,000 undergraduates would have left university to enter the jobs market. Some, if not the majority, of this increase could be explained by the increase in graduate unemployment reported elsewhere. However, there is also the possibility – one that we must take very seriously – that we are starting to see a double dip recession come into play. It is too early to say one way or the other, but this is a matter that does need to be closely monitored.

Another interesting factor coming into play is the geographical incidence of unemployment. The BBC has a really good graphic to show this (see graphic). Unemployment is now starting to become concentrated in the West Midlands, in addition to the traditional areas of high unemployment. This is not difficult to explain – the West Midlands is heavily dependent upon the automotive sector which has been hit very hard in this recession. What is interesting are the political consequences of this.

The West Midlands are a key marginal battleground politically. Margaret Thatcher won them over, to underwrite her period in office. They were won by New Labour in 1997, and have helped to keep the government in power ever since. As Gordon Brown is now seen to be the architect of the current recession, will he be able to maintain the New Labour majority in the region? I suspect that this is where the next General Election will be won – or lost.

BBC NEWS Business UK jobless total climbs to 2.4m

http://eufo.blogspot.com/2009/07/bbc-news-business-record-rise-in-uk.html

http://news.bbc.co.uk/1/hi/business/7789784.stm

The Collapse of the Baltic Tigers

In a previous post we highlighted the plight of the three Baltic States (Estonia, Latvia, and Lithuania – see post). We see the recent events in the Baltic States as the European example of the Icarus Effect – economies that have flown high and which have now hit the ground with a hard landing. As this has happened, there has been a political price to pay, and we now need to address what that price might be.

The Baltic States occupy an uncomfortable boundary between the EU and Russia. In recent years they have been suborned by membership to the EU and NATO. However, their ‘westernisation’ is relatively recent and – taking the recession into account – not that successful. Russia seems to have a ‘reconquest fantasy’ which it regularly plays out in wargames adjacent to the border.

What we also tend to forget is that each of the three Baltic Tigers has significant Russian minority as part of its population (25.6% in Estonia, 28.0% in Latvia, and 5.1% in Lithuania). This part of the population tends to look to Russia for its cultural and political lead. As time unfolds, it is not unimaginable to envisage Russian intervention in the Baltic States to support the Russian minorities. After all, this is what happened in Georgia last year.

And so, as we think about the longer future, the eastern edge of the EU might not be as stable as it appears. Global recession is placing the A8 nations under great strain, which is creating the possibility of Russian adventurism in the region.

As Icarus hits the ground, the shockwaves could reverberate far and wide!

The Collapse of the Baltic Tigers - By Edward Lucas Foreign Policy

http://eufo.blogspot.com/2009/04/icarus-in-pictures.html

What Follows The Dollar?

The pattern of international settlements is not the sort of topic that will have you sitting on the edge of your seat. It is, however, quite important – as we have recently found out. We have recently seen the recycling of excess East Asian savings into an excess of borrowing on the part of the G8. This was not sustainable. It lowered interest rates to undue levels, which fuelled speculative bubbles in key asset markets (the Stock Market and the global property market), until we reached a point where the loans being made took on a reckless air as lenders gave credit to those who had little hope of repaying their debts. And then the bubble burst.

We first had the Credit Crunch, which spread contagion into the financial system causing it to come grinding to a halt. This provided the mechanism whereby the turmoil in the Financial Economy spread into the Real Economy leading to our present recession. As we work our way out of recession, the root causes - those financial imbalances - have not gone away. Taking a futures perspective, one wonders how this might play out.

There are long term adjustments that are currently playing out. We often hear about how the balance of geopolitics is shifting eastwards from the US, but we rarely are told how this might occur. One mechanism by which it occurs is through the shifting pattern of international settlements. As the US – both in the private sector and in the public sector – becomes dependent upon East Asian finance, so the East Asian nations will have more say in geopolitical affairs.

It is through the exercise of financial power that the balance of geopolitics will be shifted. In the near future (the next decade), we can reasonably expect China to move away from a reliance upon US Dollar assets and towards a more broad currency base. When it does, it will be laying a claim to be a dominant global power. At that point, we need to look to the Inner Island Chain for potential flashpoints between the US and China.

Buttonwood: Birth pains | The Economist

Latest figures show recession is deeper and longer than feared - Times Online

This is an interesting article because of what it doesn’t tell us rather than what it does tell us. It would appear that the GDP figures for the first quarter of 2009 have been revised downwards from –1.9% to –2.4%. We can accept that the official figures may be subject to periodic revision, and that the revisions can be quite substantial at times (the GDP figure was revised by about a quarter). However, it doesn’t really convey a great deal of information about where we are now, and, more importantly, where we are headed in the future.

In a previous post (see post) we commented upon February experiencing the peak in the growth of unemployment. Since then, unemployment has been growing at a slower rate each month, which suggests that the real economy may now have turned the corner. All the GDP figures have done is to confirm that story – that things were pretty dire in the first quarter of 2009.

Are they dire now? The evidence – mainly anecdotal at the moment – suggests that things are getting easier. Industrial production is up in the East Asian economies, the commodity markets have tightened, and banks are lending again – both to themselves and real world companies. Whilst we have not recovered the ground lost, things don’t seem to be getting worse either.

For the future, the question  is whether or not we are likely to see a ‘double-dip’ recession. If things do worsen over the autumn (possibly due to swine flu) then the recession could be longer and deeper than originally feared. However, that is a pretty dystopian scenario. All of the evidence suggests that unemployment will not reach 3 million by the end of 2009, which is what the doomsters were forecasting back in December.

For now, we will just have to sit and wait to see what does actually happen. So far, it has been nowhere as bad as had been suggested by some commentators.

Latest figures show recession is deeper and longer than feared - Times Online

Britain faces 100,000 swine flu cases a day - Times Online

If this were to happen, and it may not, then it would certainly knock the recovery off course. Oxford economics calculates the cost of a potential swine flu pandemic to be 3% of GDP. That’s quite a significant number when compared to the fall of 2.4% in GDP during the first quarter of this year.

Britain faces 100,000 swine flu cases a day - Times Online

More Green Shoots?

The UK unemployment statistics for May were published this week (see report). The bad news that they contain is that unemployment has risen to the highest level for over a decade (since November 1996). However, we are of the view that they statistics contain more good news than bad news.

Unemployment rose by 39,000 in May, the lowest monthly increase this year. This is really good news on a number of levels. First, it suggests that the recessionary pressures are easing. After a peak increase in February, the rate of increase has abated throughout the Spring. Second, it implies that the economy may have turned the corner. This is the fourth month in a row where the rate of increase has fallen. If this suggests a trend, then the UK could be over the worst of the recession. Thirdly, it now starts to suggest that the dommsters who predicted unemployment at 3 million by the end of the year are now more likely to be wrong. Fourthly, if so, then the long term impact on the PSBR is unlikely to be quite as bad as has been suggested. All in all, we ought to be pleased by these figures.

The possibility of a double-dip recession is something of a concern. we have been thinking about what could cause such an event, and the most likely suspect that presents itself is a Swine Flu Pandemic. The WHO have now classed the current outbreak as a pandemic. The flu is currently dormant in the UK (the summer is its dormant period), but is active in Australia (the flu season is during the winter). A report in The Times examined the impact of a serious outbreak on the UK schools system (see report) which, if worked up to have an impact on the economy as a whole, could have a significant impact upon UK GDP.

The current recovery, such as it is, would be significantly affected by a serious disruption to the economy. This is an area of concern that we need to be aware of in the coming months.

Are We Seeing Green Shoots?

Life has kept me busy over the past couple of months, but I have still been watching for news that gives an idea of how the economy is doing. In March, we were concerned that unemployment may actually reach 3 million by the end of the year (see post). It now appears that our worst fears might have been misgiven.

After a rise in unemployment of 138,400 in February, unemployment has increased by 62,900 in March (see report) and by 57,100 in April (see report). This would indicate that the pace of the increase in unemployment is slowing. If the pace continues at an increase of 60,000 per month, then unemployment will reach 2.75 million by December. Each one of these statistics is a tragedy in itself, but not quite as bad as the doomsters have been forecasting.

There is a possibility, however, that we shall witness a 'double dip' recession. If so, then we may be currently experiencing that false recovery after the first recessionary impact. If this is the case, then the pace of the increase in unemployment may accelerate over the summer. Let us hope that this is not so.

We also ought not to assume that recovery, when it comes, will entail an uptick in employment. It is entirely possible that we could experience a 'jobless recovery', where business improves, but fewer new staff are taken on. To a certain extent, we ought to porepare for this if there presently is a great deal of slack in the economy - 'hidden unemployment' within organisations.

Let us hope that we are witnessing the start of the full recovery. That is certainly what the financial markets seem to be saying.

Icarus In Pictures

Developing the theme of The Icarus Effect that we outlined in a recent post (see post), we are now starting to amass data that allows us to demonstrate the point graphically. For example, the following graph appeared in a recent article in The Economist (see article):

The graph shows the economic performance of the Baltic States since accession to the EU, along with a forecast of economic performance into 2009. From 2004 to 2007, the three nations (Latvia, Lithuania, and Estonia) performed well above the EU average (GDP growth between 7% and 12% per annum). In 2007 this performance nosedived. Between 2007 and 2009 (forecast), GDP is set to fall substantially, between -8% and -12%, with no clear view as to where the bottom is likely to be. A performance well below the EU average.

This is The Icarus Effect in action. Those economies flying high at the beginning of the decade are now starting to crash in a spectacular fashion. However, it is not the economic consequences if this that grab our attention. It is the political (and social) fall-out that will mark this phenomenon.

The Return Of Big Brother!

We have speculated in a previous post that one of the features of the New Normal would be a greater involvement of Government in the working environment (see post). Originally we thought that this would be through politically inspired lending criteria deployed by the banking sector of which most Governments now own a greater part.

It now transpires that Governments are willing to intervene in areas beyond the past boundaries of interference, to become active in matters that formerly they would not have. For example, the resignation (sacking?) of Rick Wagoner at General Motors serves as a good illustration of this point (see story). It seems that Mr Wagoner had become too associated with the failed GM business model and was too unwilling to adopt the new agenda that he became an unacceptible CEO of GM for President Obama. The story implies that Mr Wagoner's resignation was a pre-condition for further government assistance.

This raises an interesting point of company law. The CEO is normally appointed by and accountable to the shareholders of a company. It now appears that, if the company receives public bailout money, the political masters have the right of veto over the decisions made by the shareholders as to who the CEO ought to be.

One could argue that as public money is being used to prop up the company, the public - through their elected representatives - ought to have some say over how that money is spent. This argument has traction, but loses its force in a globalised world. Is GM an American company? It is owned by shareholders from all over the world. It operates on a global level. It is receiving public bailout funds from more than the USA. So ought the American President hold such an important veto?

For shareholders from outside of the US, this is a de facto nationalisation, only without the necessary legislation and, more importantly, compensation. It will be interesting to see how the Chinese stockholders of GM respond to this, as the US sends out the message that it is not open for business and that it can be quite an unreliable trade partner by not keeping to its own rules when they prove to be inconvenient. In many ways, this is a blow to globalisation and narrow victory for the Neo Nationalists (see post).