Drawing on the dread of rising deleveraging comes yet another doomsday prophecy. This time it’s courtesy of Dr. Gary Shilling, economist and president of U.S.-based advisory firm A. Gary Shilling Inc.
Given his forecasting record, it is clear that Shilling’s withering assessments are not based on uncertainty of events, but the certainty of their outcome. He was speaking at the 34th Annual Forecast Dinner on January 26, 2012, hosted by CFA Vancouver.
“I think we’ve probably got another five to seven years to go at the rate we’re seeing the working down of debt in the private sector, and we haven’t even started in the major governments” he said. “It is a long process, and it does mean that we do have slow growth at best. And when you’ve got slow growth, the likelihood of recessions being more frequent is simply the order of the day.”
The overarching reality, he said, is that we are in the age of deleveraging. First it was the private sector, but now governments must start paying off debt due to their “response to the great recession [which] put governments in a lot of trouble in terms of excess sovereign debt issues.”
All but Canada, he adds.
Investors in North America who are eyeing emerging markets for higher growth should be cautious. Shilling says that though these markets are growing faster in relative terms, in absolute terms they are teetering on the verge of recession.
“In China they need about 8% gross GDP growth to accommodate the new entrants to the labour force; if you get down to the 5% or 6%—they got down to 6% in the last recession—that’s a major recession for China.”
And it’s not just China, the same is true for most emerging economies.
“If you look at Taiwan, Thailand, Indonesia, they all have been growing rapidly, but they need to as they industrialize. So slower growth there means it’s slower relative to what it takes to keep the economy pretty much in balance.”
High growth by developed country standards is not sufficient to keep stocks from falling, he warned.
But there is another factor that makes Shilling wary of emerging markets. It’s the weakening case for decoupling.
“There’s no such thing as decoupling; these economies still are export driven, and those exports go, ultimately, to the U.S. and to North America,” said Shilling. “This whole decoupling argument is more a hope than reality.”
The Continent, according to Shilling, is going to have an even bigger recession than it had in the 2007-2009 period, when real GDP in the eurozone went contracted 5.5%.
“You’ve got a combination of the financial crisis spilling over into the real economy; that’s very much like what the U.S. had in the 2007-2009 recession,” he said.
But there’s a major difference: unlike the U.S., Europe lacks a common fiscal policy.
The Germans demand to see more discipline before committing more money, but meet with resistance from southern European countries wrangling for more money without assurance of discipline, he added.
“[With] 17 countries in the eurozone, they have a much bigger problem. How do they get together the Teutonic north with the Club Med south in a common fiscal policy?” he asked. “I just think there’s so much in the way of problems there, and so little likelihood that they’re going to get resolved.”
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