Worldwide Economic Slowdown: The Global Economy Has Peaked This Cycle

Mike Shedlock discusses  the probability of a Worldwide Economic Slowdown.

TODAY, WE WILL we will take a look at three countries: the United States, New Zealand, and the United Kingdom. That, of course, is a far cry from the world, but to that you can add in a huge property bust in China that is now under way as well as a stagnant Europe (many countries) that never really got going. Europe borders on deflation, and a global slowdown just might do them in. You might also consider how a slowdown in U.S. consumer purchases will affect the world.

AFX News is reporting “NZealand Business Survey Points to Slump in Confidence as Economy Slows”:

“Business confidence in New Zealand has slumped to its lowest level since 1986 as the nation’s economic growth slows, according to the New Zealand Institute of Economic Research (NZIER) quarterly survey of business opinion.

“The institute said the December quarter survey suggests the economy is currently in the throes of a potentially acute slowdown.

“While inflation is likely to hover near the top of the Reserve Bank of New Zealand’s target band of 1-3% annual CPI inflation or marginally above it for some time, NZIER said it believes the survey results suggest the central bank can afford to hold and then gradually loosen monetary policy during 2006 and into 2007.

“It said slowing domestic demand will reduce underlying inflationary pressure while further interest rate rises will exacerbate the sharpness of a downturn which is already very clearly under way.

“In December, the Reserve Bank of New Zealand raised its official cash rate 25 basis points, to 7.25%, in an attempt to slow domestic demand and maintain the rate at the highest level among industrialized nations.

“Last month, NZIER said New Zealand’s economic growth is likely to slow to 2.3% in the current year to March 2006, from 3.6% a year earlier, as business activity slows and domestic demand eases following two years of rising interest rates.
“The December quarter survey showed a net 61% of firms expect business conditions to deteriorate over the next six months, compared with 32% in the previous survey.

“Seasonally adjusted, a net 71% of firms are despondent, compared with 34% in the September survey.

“NZIER said the sizable increase in negative sentiment in the December quarter occurred throughout all regions and all industry groups, with manufacturers the most pessimistic.”

Worldwide Economic Slowdown: U.S. Q4 GDP 2.7% Annualized

MarketWatch is reporting the “U.S. Economy Slows to Below Trend”:

“The U.S. economy grew at the slowest pace in nearly three years in the just-concluded fourth quarter, economists estimate.

“Led by what could be the weakest consumer spending since 1991, the economy likely grew at about a 2.7% annual pace in the fourth quarter after 11 straight quarters of growth above 3%, economists say.

“The slowdown is just what the Federal Reserve wants at this point in the business cycle. The Fed has boosted its short-term interest rate target 13 times since mid-2004 in a bid to put the brakes on the economy.

“Above-trend growth has been sopping up excess capacity in the economy and leading to shortages and bottlenecks that can fuel inflation.

“The Fed is expected to raise rates again on Jan. 31 and likely in March.

“Few economists expect the slump to worsen significantly. For the first quarter, economists are estimating growth at 3.6%, approximately the economy’s long-term potential. Most economists do see growth slowing again at the end of the year as the housing market weakens.

“‘The economy could get back to an above-trend rate this quarter, and that is what will matter to monetary policy makers,’ said Joseph LaVorgna, chief U.S. fixed income economist for Deutsche Bank.

“While most economists had forecast a modest slowing in the fourth quarter, it looks as if the slump was worse than expected. At the beginning of the quarter, economists were expecting growth of about 3.2%.

“Consumer spending, business investment, and government spending all underperformed relative to expectations. The collapse of auto sales likely subtracted a full percentage from growth, UBS economists said.

“Housing was one of the few bright spots in the fourth quarter’s growth mix, along with inventory rebuilding.

“‘We do not believe the apparent weakness in the fourth quarter represents a clear change in the trend,’ said James O’Sullivan, an economist for UBS. GDP will likely slow from about 3.6% in 2005 to 3% in 2006 and 2.7% in 2007, he said.

“The course of consumer spending this year is very much an open question. Some economists, such as Ian Shepherdson of High Frequency Economics, believe a sharp slowdown in housing later this year will force consumers to rein in their spending.

“It’s possible that consumer spending outpaced consumer’s disposable incomes in 2006 for the first time since the Great Depression.

“Paul Kasriel, top economist for Northern Trust, figures that $2.5 trillion of outstanding household debt will reprice at a higher interest rate this year, forcing households to devote more of their paycheck to servicing their mortgage and credit card bills.

“But other economists say consumer spending will be fine this year. Household income growth should be strong enough to maintain healthy spending.

“‘We expect consumer spending growth to remain solid this year even as the housing market slows,’ said Dean Maki, economist with Barclays Capital. Most of the wealth that households extracted from their home equity was used to pay down more expensive debt, not to fund current consumption, Maki said. That would make consumer spending less vulnerable if home prices fall.”

Let’s dissect some quotes and ideas from that article:

“Housing was one of the few bright spots in the fourth quarter’s growth mix.” Seriously, where do they get this stuff? Enquiring Mish readers want to know.

“‘We do not believe the apparent weakness in the fourth quarter represents a clear change in the trend,’ said James O’Sullivan, an economist for UBS.” I beg to differ, but I think we will soon find out what kind of “inflation-fighting prowess” incoming Fed chief Ben Bernanke is made of, as well as the ability (or not) of this economy to take two more hikes. I suspect Greenspan is thanking his lucky stars to be able to dump one nightmare of a problem right In Bernanke’s lap.

And lastly, household income growth should remain strong. Now there’s a joke. Wage growth and job growth have both been dramatically below par throughout this entire recovery.

OK, that’s enough U.S. silliness.

“Manufacturers continued to find it difficult to pass on increases in their raw material costs during December, official figures showed today.

“Even though the annual rise in input prices during the month was the highest since records began in 1991, the office for National Statistics revealed that output prices fell for the third consecutive month for the first time since August 2001.

“Between November and December, output prices, on a nonadjusted basis, fell by 0.2%. Although the fall was less than the previous month’s 0.3%, analysts had actually predicted a 0.1% increase…

“The subdued monthly output prices may come as a surprise to some analysts and officials at the Bank of England because of another increase in input prices, which rose 0.9% in December from November on a seasonally adjusted basis, just shy of analysts’ expectations of a 1.0%.

“On a year-on-year basis, input prices were up 17.2%, higher than analysts’ expectations of a 15.7% increase. The December rise was the highest since records began in 1991.”

Input prices were up 17.2%, but there was no ability to pass on price increases. Fancy that. It’s a possibility only diehard deflationists would consider possible.
Record Numbers Call Debt Advisers After Christmas

The Guardian is reporting “Britain Cuts Back on Credit Card Habit”:

“Spending on credit cards has shown a year-on-year fall for the first time, according to figures from Visa, indicating that consumers are taking on board warnings about running up too much debt. Instead, shoppers are using their debit cards for their spending.

“The data from the card group coincided with news of a surge in the number of calls to debt advice lines during the first two weeks of the year as borrowers took stock after Christmas…

“Record numbers of people were calling debt advisory services after finding they were struggling to pay back what they owe. The Consumer Credit Counseling Service took 9,310 calls in the first nine working days of the year — up almost 14% on the same period in 2005.

“National Debtline also reported huge demand, receiving almost 13,000 calls between Jan. 3 and lunchtime on Friday. The organization admitted that the surge in demand had left it struggling to cope, with about two-thirds of its calls going unanswered, although it said most people did get through on subsequent attempts.

“It said it was in the process of recruiting 25 additional staff to add to the 55 employees who currently answer its phones in an attempt to meet the demand.”

Worldwide Economic Slowdown: Property Bubbles Popping

If you missed the housing situation in China, you may wish to read my “Shanghai Housing Bubble Pops.”

I also suggest watching “Centex ‘One Day’ Sales” to see if they really are for “one day” only. I doubt it.

You might wish to check out this recent report on San Diego housing. The San Diego Union-Tribune is reporting “House Resales Take a Tumble in December”:

“San Diego County resale house prices tumbled last month by the biggest number in 18 years of record-keeping and contributed to the smallest year-to-year rise in overall prices in six years, DataQuick Information Systems reported Monday.

“The median resale price for existing single-family homes dropped $15,000 from November to December to stand at $550,000, the largest month-to-month decline since DataQuick began keeping records in 1988…

“Last year was the first time since 2001 that the number of home sales fell from the previous year. The total sold last year was 55,366, down 9.1% from 2004’s 60,886…

“Monthly sales reports from DataQuick have showed a decline in activity on a year-over-year basis for 18 straight months.

“On Thursday, the San Diego Association of REALTORS, which monitors about 60% of the housing market, reported that properties took longer to sell in 2005 than in 2004 – lingering on the market for, on average, 62 days last year, compared to 54 in 2004.

“And the total number of listings has been growing, reaching a peak of just over 15,000 listings in November, about five times more than at the peak of the buying frenzy in spring 2004.”

Worldwide Economic Slowdown: Summary

• Fourth-quarter U.S. GDP was 2.7%, a dramatic slowdown likely to continue
• No pricing power in the United Kingdom, in spite of massive rise in PPI
• A property bust in China
• A property bust beginning in the United States, and spreading dramatically
• ECB President Jean-Claude Trichet very cautious on European Union hikes, as Europe has lagged the world
• Europe is just too little, too late to fuel the world economy
• Record numbers calling debt advisers after Christmas.
• Fueled by massive bubbles in consumer spending and housing, both are now headed down, the global economy has likely peaked this cycle

It remains to be seen how Bernanke deals with it.

Regards,
Mike Shedlock ~ “Mish”
February 2, 2006