By: Dr. Mike Campbell
I have good news and bad news for you. The world’s economy will recover from the global financial crisis – that’s the good news. The bad news is that at some future date, the world will be plunged into another global recession; such is the nature of economics. Traditionally, economics is a series of boom and bust cycles. The trick is to spot when the markets are about to tank and cash up. If you missed that one, then a second opportunity is to be found when stocks bottom out since at that point, the only way is up. Unfortunately, there is no certain way to tell where we are within this particular cycle, but it would be fair to say that we are now closer to the end than the middle. This cycle has been worse than most in that the recovery phase is traditionally more marked than has been the case this time. Probably, this is due to the specifics of this cycle; namely the extent of the downturn and the impact of uncertainty associated with the sovereign debt crisis. The sovereign debt crisis is an unprecedented component since, in previous cycles, there was never any doubt that a (major) sovereign economy could default on its obligations.
Evidence for the patchiness of the recovery was furnished by the UK and America in contrasting balance of payment fortunes. In the UK, the trade gap widened to £3.4 billion in January following an upwards revision of the earlier estimate (£2.5 billion). The culprit was that exports to non-EU states were weaker than had been thought. Imports remained unchanged, but export demand, notably for cars, softened.
On the other side of the pond, the US trade gap narrowed in February. US imports slipped back whilst their exports strengthened. The net result was that the balance of payments deficit for the month came in at $46 billion (down from $52.5 billion in January). This data is in contrast with the lack-lustre employment figures that were released just before Easter.