Will macroeconomic gloom turn to doom?

Manufacturing's down, the markets are down, gold is up - it's been bad news all round of late.

by Adam Gale
Last Updated: 12 Feb 2016

Bad news get views (and sells papers if you're one of those dinosaurs), but even so the tone of stories about the wider economy has been a touch morose of late. Recently, we’ve learned that British manufacturing declined 0.2% in 2015, that nobody wants to own bank stocks anymore (HSBC has lost a quarter of its value since December, while Barclays has lost a third) and that US Federal Reserve chair Janet Yellan doesn’t have enough faith in the US recovery to raise rates again, at least not for a while anyway.

Gold, that perennial haven of the cautious wealthy, has meanwhile risen 16% since December to $1235 an ounce, as equity markets continue to slide. But what does all this mean? Are these harbingers of macroeconomic doom, or merely a spot of gloom?

The case for doom is a little exaggerated. While western banks’ exposure to cash-strapped oil firms is a worry, the financial system now is much more robust and resilient than it was before the crash. The far bigger risk is that China’s contraction is or will become more severe than we’ve been led to believe, and that China’s financial system will collapse, bringing everyone else with it.

That’s not implausible, but then there’s no real reason to suspect it’s either imminent or inevitable. As far as we know (thank you, faceless communist bureaucrats), most of China’s economy is still growing at a handsome pace, and there are no signs of banking collapse.

There may not be a cataclysm on the horizon then, but unfortunately the case for gloom is somewhat stronger. The economic data may not be very inspiring right now, but then the recovery since the last crash never really got underway in Europe. There are legitimate concerns that slow growth (possibly stagnation with a spot of deflation thrown in for good measure, a la Japan) is the new normal for economies with ageing populations that are unable to wean themselves off low super-low interest rates.

This too is uncertain though. What seems fairly certain is that, for the time being, worries about China are depressing markets around the world. The only glimmer of hope is that cheap oil is historically correlated with periods of worldwide economic growth. Bring on $20 a barrel. 


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