23 July 2012Asset managementThe ongoing recovery from the recession, if you can even call ita recovery, has been anything but smooth. Each of the last twoyears was interrupted by an episode of disappointing data and
an accompanying sell off in risk assets. This year now appearsto be duplicating that past trend of mid-year dips.
Pretty much everyone has already accepted that growth in
the Eurozone is going to be very weak. The IMF was the last
organisation to be moderately optimistic about the UK, and itrecently revised down its forecast for both this year and nextyear. China has confirmed that it is slowing down gently. Japan isgrowing at a fairly steady pace, and until recently so was the US.The recent wave of data in the US has been disappointing to
investors. Most striking has been the very sharp drop in the ISM
new orders survey for manufacturing, but the tone in othersectors has also been softer. Retail sales and new home sales
came in well below expectations, and the labour market data
show job growth has slowed drastically. So is this a downturn
just like last year, or is it the start of something more ominous?
Consider how this US data dip compares to the previous years’dips. The flow of data (see chart 1) shows the central trendin the economic indicators shifting downward in an almost
identical path. The key difference is that the indicators were
notably stronger prior to last year’s dip than they were priorto the current dip. On the one hand, this tells us that our
current starting point was weaker, but on the other hand it also
demonstrates that the relative size of the slowdown is less.
How do the drivers of the data dips compare? The most obviousdifference is that last year had an exogenous shock in theform of the devastating earthquake in Japan. Firms were not
quite prepared for the degree to which disruption in Japan fed
through into supply chain disruption elsewhere. This disruption
was not enough in itself to justify the extent of the downturn.
The dip persisted thanks to the damage to confidence from
political uncertainty: a worsening situation in the Eurozone andthe struggle with the debt ceiling in the US. There is a clear
similarity with this year, thanks to the problems in Spain and Italy
and the looming US fiscal cliff that will follow just a few monthsafter the November election.
Senior Fixed Income EconomistUBS Global Asset Management
Fixed Income EconomistUBS Global Asset Management
Chart 1: Triple roller coaster
Range of survey indicators of economic activity in the US,
normalised to match two-quarter US GDP growth
Source: UBS Global Asset Management
-8-6-4-20246GDP Growth Qo2Q ARCentral trendOutliers200720122011201020092008
Recent US data have resembled the same weak patternobserved in 2011. In comparison with last year, thereare some key differences in the drivers of the data dip.
The global economy in 2011 was hit by a devastating
earthquake in Japan and sharp increase in oil price.
However, there are also a number of similarities: theEurozone sovereign crisis and, more importantly,
uncertainty linked to the US debt ceiling and the fiscal cliff.In this context, it is not surprising that firms and households
cut spending, but recent experience suggests that thismight be just enough to duplicate another soft patch.