Stephen King We don’t need the genius of Biff to tell us stormy economic times beckon
AFICIONADOS of Back To The Future Part II know the importance of Grays Sports Almanac 1950-2000. Old Biff travels back to 1955 to give it to his younger self. Young Biff is more than a little stupid but his older ego tells him that, by betting on future sporting events using the results contained in the almanac, he can become very rich. In one version of the future — thanks to the almanac’s secrets — a middle-aged Biff is able to lord it over a dystopian version of Hill Valley.
Imagine a similar almanac existed, focusing not so much on sporting results but, instead, on economic outcomes, a compendium that set out the path for booms, busts, recoveries and recessions, allowing the canny investor to make bets on interest rates, currencies and stock markets. What might such an almanac say about prospects over the next couple of years? And how might it differ from current “consensus” thinking?
Forecasters habitually assume that the future is “business as usual”. They rarely anticipate either booms or recessions. In that sense, they pretend that, like smartphone keypads, economies “autocorrect”. It’s a handy assumption most of the time but, as we discovered during the global financial crisis, i t ’s a n assumption that can sometimes go badly wrong.
Before the global financial crisis, forecasters believed recessions were only likely to happen following periods of excessively high inflation. Their economic models — mostly calibrated during an era in which inflation tended to be too high, not too low — reinforced this view. They had little to say even as financial institutions began to fail. In spring 2008 — after the collapse of Northern Rock and the rescue of Bear Stearns — the IMF still thought the UK could look forward to an economic “soft landing”. In the event, the British economy shrank more than four per cent in 2009.
Today, forecasters are similarly relaxed about the future. If, however, our imaginary economic almanac informed us that the world economy was to enter recession in 2020, would we really be that surprised? I don’t think so.
Already, the available economic barometers are suggesting the onset of inclement weather. On both sides of the Atlantic, the most recent surveys of manufacturing health are suggesting that recession may not be far away. Long-term borrowing costs have tumbled, betraying fears among investors that those central banks who still have room to manoeuvre will have to slash interest rates in response to a major economic downturn. And, only last week, as investors began to rethink the medium-term outlook for corporate profitability, stock markets tumbled.
Admittedly, bad business surveys and stock market jitters are, in themselves, no guarantee that things really will deteriorate. They do suggest, however, that we should be on the lookout for the economic banana skins that might lead to a major slip-up. In the Seventies, those banana skins were primarily associated with inflation. Before the global financial crisis, they were linked to house prices, sub-prime mortgages and the hidden plumbing of the financial system.
And today? The most compelling case for an economic banana skin is the escalating trade war between the US and China. When President Trump was elected, wise heads quickly concluded that he would swiftly ditch his campaign promise to challenge the Chinese on trade: it was, they said, a “lose-lose” battle. With the benefit of hindsight,
The UK’s own Brexit uncertainties are merely the icing on an increasingly unappetising cake
the wise heads were both right and wrong: right because the battle really is proving to be “lose-lose”; and wrong because, despite mounting evidence of losses, trade tensions continue to escalate. Worse, this is no longer a uniquely Trumpian issue. Anti-China rhetoric now enjoys bipartisan support in Washington, suggesting that the problem could extend beyond Mr Trump’s own sell-by date.
It’s tempting to think that Sino-US trade spats have little to do with us. Unfortunately, the fallout is already visible in some of our most important trading partners. Germany, for one, may already be in recession, hit hard thanks to its status as one of the world’s foremost manufacturing exporters. Companies the world over are taking a much more cautious approach to investment, no longer confident that the global supply chains that have done much to deliver economic progress in recent decades will continue to proliferate in coming years. The UK’s own Brexit uncertainties are merely the icing on an increasingly unappetising cake.
Our imaginary almanac also helpfully tells us what policymakers will do in response to the coming recession. The policy lifeboats are no longer as plentiful as they once were. With interest rates having barely risen since the global financial crisis, central bankers can no longer slash rates with the monetary abandon of old.
That means more in the way of quantitative easing, even though it tends to have a bigger impact on financial asset prices than on the economy at large. And, after years of austerity, governments rediscover the attractions of borrowing, thanks to absurdly low interest rates. Whether this reinvigorates growth, however, is another matter altogether: Japanese government debt has been rising for years yet its economy continues only to limp along.
Just like each period of alternative history in Back To The Future, every recession is different. Economists and policymakers tend to rule out the possibility of future downswings because they say, with confidence, that the inflationary or financial fault lines of old are no longer relevant. That, however, is a mistake. In the unlikely scenario that the author of our imaginary almanac is none other than Leo Tolstoy, the introduction might wisely state that “economic upswings are all alike: every economic downswing is a downswing in its own way”. Not that Biff would understand.
⬤ Stephen King (@kingeconomist) is HSBC’s senior economic adviser and the author of Grave New World (Yale)