A two-speed recovery

The global recession is over, so we keep getting told by the cheerleaders of recovery.

However, evidence mounts of a two-speed recovery that could well come unstuck if its velocities can’t be synchronised in time.

Driving in the fast GDP growth lane are the Asia Pacific economies, whereas sputtering along in the slow GDP growth lane are the Western developed economies.

Japan, although lying in the Asia Pacific region, is an exception that belongs to the Western developed economies club and so is a fellow traveller in the slow lane.

Many other Asia Pacific economies are either emerging markets or newly industrialised countries (NICs), although the likes of Australia and New Zealand are old hands from the Western developed economies’ camp who have more recently switched allegiances and joined the Asia Pacific upstarts.

Obviously there is some arbitrariness about who gets assigned to which category, but right now which lane an economy is rattling along in determines where it gets placed.

The two-speed global economy has also manifested itself in two-speed financial markets.

The big rally in Western stockmarkets since March of this year has been outpaced by a surge in Asia Pacific stockmarkets.

Everyone is jumping on the growth recovery story, it seems, but there is room to doubt whether the Western version is the real thing, and that causes wonder about the rest of the glad tidings story.

Grounds for unease are shown in the most recent International Economic Trends report published by the St Louis District of the US Federal Reserve.

In the report the St Louis Fed has updated key economic statistical graphs for the chunkiest of the Western developed economies:

• USA
• Canada (a partner in NAFTA with the USA)
• Euro area
• The biggest Euro area economies: France, Germany, Italy
• UK (An EU member with the Euro area economies)
• Japan (an honorary Western developed economy)

Looking through these graphs is reminiscent of having a tooth drilled without anaesthetic.

All sorts of economic statistics tracked by the St Louis Fed look like anything but a recovery story.

Take, for example, capacity utilisation, a measure of how hard manufacturing assets are being worked.

The answer is that these factors of production are on a two-days-on, one-day-off regime.

The St Louis Fed report shows that in ascending order, capacity utilisation is running at: Canada 64%, USA 65%, Italy 66%, Euro area 70%, Japan 71%, France and Germany 72%, and UK 73%.

So when we get told that comatose manufacturing is waking up, it pays to remember that it may merely have opened its eyes and started blinking them again, rather than having leapt upright from its couch of slumbers.

Such a huge capacity excess will take a long time to absorb before the Western developed economies concerned have got back to where they were before the global financial crisis, let alone growing beyond those earlier levels.

Moreover, it is dollars to doughnuts that many of these economies overbuilt manufacturing capacity when it seemed like the Great Moderation’s conveyer belt of endless annual GDP growth stretched out from here to eternity.

How about industrial production, another measure of how hard productive assets are working?

According to the St Louis Fed’s stats, and again in ascending order (negative numbers), year-on-year change in industrial production is as follows: Japan –26%, Italy –23%, Germany –22%, Euro area –18%, France and Canada –15%, USA –13%, and UK –12%.

It doesn’t take much of an uptick in these negative industrial production growth figures for three cheers for the recovering global economy to ring out.

Yet in the case of Japan, for example, which has clicked up from the rock bottom year-on-year change of –32%, it is a triumph of optimism to assume the good times lie just around the corner.

The kinds of statistics quoted don’t always make headlines, but they are diagnostic of the real economies they represent.

As pointed out above, it doesn’t take a big change in the right direction for the cry to go up that we have turned the corner.

Other statistics published by the St Louis Fed show how these disastrous real economy numbers have been masked by financial sleight of hand.

Money supply and fiscal deficits have exploded as governments and central banks resorted to emergency fiscal and monetary stimulus – perhaps the word is intravenous adrenaline injection - to stop economies from going into full cardiac arrest.

These policies are going to wear off next year, and then it will become apparent whether the heart patient – the real economy – has recovered enough to return unaided to full time work.

Odds are, with key real economic statistics so depressed, this will not happen soon for the big Western developed economies.

Of particularly serious concern – implied in gross excess capacity and slumped industrial production – is high unemployment.

Not only is employed labour a factor in goods and services production, it is also the key consumer of most goods and services in developed economies.

It will be ages before employment trends rise strongly again when industrial capacity and production output are so anaemic, hence talk of a jobless recovery.

Statistically things can look better – for example, month-on-month capacity utilisation and industrial production could rise incrementally, giving hope to the boosters of recovery – but if tens of millions of workers are still out of a job, where will be the demand to take Western developed economies back to where they were pre-crisis and then beyond?

Against that dreary backdrop, we will see whether the Asia Pacific economies can keep up their speed in the fast lane, because they won’t be trading as much as they might wish with the Western developed economies, nor perhaps will they have created the substitute domestic demand or trade between themselves necessary to keep going apace.

The two-speed economic recovery could be headed for sharp, one-speed deceleration into an increasingly crowded slow lane.

In the meantime, an air of unreality has come over stockmarkets pricing in further growth for companies which, as the St Louis Fed’s statistics reveal, is not coming from any large and sustained improvements in capacity utilisation or industrial production in Western developed economies.

Cost cutting, labour layoffs, and cautious inventory rebuilding can only go so far in keeping up the corporate earnings growth story sharemarkets are banking on, not to mention the jiggery-pokery of companies underforecasting expected results to look like heroes when they miraculously exceed their bogus targets.

Two-speed financial markets may skid headlong into a motorway pile-up once it dawns that Western developed economies are far too damaged at the real economy level to justify the euphoria so far expressed at anything resembling corporate revival.

As an old American popular song went, “It’s a long way to the top if you wanna rock’n’roll.”

The song was self-referential to the popular music industry, but these days applies to virtually any industrial sector in a Western developed economy one might care to mention.