If there is a Re­ces­sion in 2016!

The Pak Banker - - OPINION - Neil Ir­win

MORE and more news head­lines and stock mar­ket an­a­lysts' re­ports have started pre­dict­ing, or at least in­sin­u­at­ing, that a re­ces­sion could be near in the United States. I've been skep­ti­cal; the econ­omy may not be great, but I've had a hard time en­vi­sion­ing how eco­nomic tur­moil in coun­tries like China and Brazil and su­percheap oil could some­how com­bine to drag down the mighty United States econ­omy. That's why my Oc­to­ber ar­ti­cle on the eco­nomic out­look ended not with any bold con­clu­sion, but with the "shrug­gie" emoti­con.

But af­ter think­ing about it some more and talk­ing with some peo­ple on the pes­simistic end of the spec­trum, I think I have a han­dle on how the econ­omy could end up in a sub­stan­tially worse place by the end of the year. Here's that nar­ra­tive.What we're deal­ing with isn't just a run-ofthe-mill eco­nomic slow­down in emerg­ing mar­kets, but the re­ver­sal of a 15-year cy­cle in which cap­i­tal has flowed into emerg­ing mar­kets year af­ter year while debt grew. Now that's re­vers­ing, and we're see­ing a ver­sion of War­ren Buf­fett's maxim that "you only find out who is swim­ming naked when the tide goes out."

In other words, now that cap­i­tal is go­ing out rather than com­ing in, we're see­ing just how much of the growth in Asia, Africa, East­ern Europe and Latin Amer­ica since 2000 has been driven by a credit bub­ble and how much is real, durable eco­nomic ac­tiv­ity. (Read my col­league Peter Eavis on the bad loans in ques­tion.)

This will put those coun­tries' economies un­der pres­sure. Global in­vestors will dis­cover more poorly run com­pa­nies and weak gov­ern­men­tal struc­tures than they had gen- er­ally as­sumed ex­isted dur­ing the emerg­ing mar­kets boom, when an in­flux of for­eign money masked those prob­lems.

The steep drop in oil prices is both a cause and ef­fect. For oil-pro­duc­ing coun­tries (in the Middle East, cer­tainly, but also the likes of Rus­sia, Brazil, Mex­ico and Nige­ria), fall­ing oil prices mean a drop in rev­enue and a lot of stress on ma­jor oil com­pa­nies. And the slow­down in eco­nomic ac­tiv­ity across global emerg­ing mar­kets re­duces de­mand for oil, cre­at­ing a vi­cious cy­cle.

That isn't the only vi­cious cy­cle at work here. The weak­en­ing of emerg­ing economies causes their cur­ren­cies to fall rel­a­tive to the dol­lar. Now that should help their ex­porters, but in the cur­rent mo­ment it can make the debt cri­sis worse. Ev­ery tick the Chi­nese ren­minbi, the In­done­sian ru­piah or the Brazil­ian real goes down against the dol­lar makes it harder for the coun­tries' com­pa­nies to re­pay their debts. Then you get fur­ther re­trench­ment.

But our story of how the United States might fall into re­ces­sion isn't done. Ex­ports to th­ese emerg­ing economies are a small enough piece of over­all Amer­i­can G.D.P. that it would take an all-out col­lapse to move the dial on United States growth. And the en­ergy sec­tor in the United States ex­panded a lot in the last few years, but oil and gas ex­trac­tion still ac­counted for only 730,000 jobs in De­cem­ber, in an econ­omy with 143 mil­lion of them. So in nor­mal times, an emerg­ing mar­ket panic, a drop in oil prices and a strength­en­ing dol­lar shouldn't mat­ter much for the United States. In 1998, for ex­am­ple, all of those things were hap­pen­ing, yet growth roared ahead in 1999. But if there's a re­ces­sion in 2016, it will be be­cause of two cru­cial dif­fer­ences in the econ­omy.

First, the start­ing point for the United States and other ad­vanced economies was much stronger then. From 1996 to 1998, the United States econ­omy grew an av­er­age of 4.3 per­cent a year; from 2013 to 2015 the rate was less than half that, 2.1 per­cent. A much smaller hit to growth would be more likely to put us in re­ces­sion­ary ter­ri­tory now than in the late 1990s. That lower eco­nomic start­ing point could al­ready be hav­ing some psy­cho­log­i­cal im­pacts that slow growth. Per­haps the weak un­der­ly­ing con­di­tion of the United States econ­omy is a rea­son con­sumers are largely putting their sav­ings from lower en­ergy prices into in­creased sav­ings rather than buy­ing stuff.

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