- Chris Walker, Foreign Exchange Strategist at UBS
After 2-3 years of humbled growth since the breakdown of the previous deep economic downturn, the media headlines are again full of a new recession forecasts. In this respect, Dukascopy has interviewed an expert in finance, Chris Walker, Foreign Exchange Strategist at UBS in London and received his exclusive opinion on the possibility of a new global recession.
1) What is your forecast of the upcoming economic developments? In what way can the new recession be different from 2008?
It could be argued that the current period of economic weakness stems from a failure to fully recover from the initial shock of 2008. The massive monetary and fiscal stimuli's seen since then have an effect on some asset prices (most notably the Fed's Quantitative Easing programmes) but this has not helped labour markets and the real economy. No structural reforms have been made and the events in the Euro zone have added another dimension. As such, we maintain a cautious view on economic developments over the next few years, we do not expect a full blown recession as our base case but it is certainly conceivable and, probably at best, we can expect several years of very anaemic growth which is not much better.
To some extent investors may have become slightly too bearish, when data releases particularly out of the US were falling sharply in the summer. If we had seen a continuation of that pace of decline then a recessionary environment would be very likely very soon but data has moderated and fits in line with the view of no immediate recession but very sluggish growth. The European or rather global debt crisis has the ability to change this, however, in the same way that Lehman acted as an exogenous shock in 2008 to completely destabilise markets, a disorderly default in Greece could have the same effect.
Remember, this is all in a context of governments, particularly in Europe, imposing strict austerity measures, something that will inevitably keep the average citizen underwater and hit growth momentum in any case.
2) Can you list the top "winners" and "losers" in case of a new global recession?
It is hard to pick a �winner' in a global recession, at least on an absolute basis. I guess relatively speaking you would look at the areas which would be least badly affected by a widespread recession. My immediate suggestion would be in Europe, the likes of Norway and Sweden, fiscally sound states with good governance and well-educated workforces. Unfortunately, due to the nature of these small open economies, they are very susceptible to global growth momentum, export demand and general risk appetite, so in this context would also suffer. Some emerging markets also share these traits, relatively debt-free states, like Singapore would be expected to benefit but again are susceptible to trade flows and stalling export demand. The countries worst hit would be debt-laden, uncompetitive economies many of which are in the Euro zone.
3) In 2008 in a time period from peak in June to September S&P 500 and S&P Goldman Sachs Commodity Index (GSCI) tumbled by 20% and 24% respectively. Following the Lehman Brothers' bankruptcy in September and the start of market sell-off, the indices plunged by nearly 70% till the end of the year. In 2011 in a time period from May till today S&P 500 and S&P GSCI indices have already dropped by 13% and 26% respectively. Do you consider that the history will repeat or there may be another scenario? Have the past mistakes been taken into account?
I'm not an equity strategist but in times of financial contagion and widespread risk aversion, cross-asset correlations jump towards 1 and a �sell all' mentality swamps markets (unless of course you're trading dollars or bonds). Clearly there needs to be a catalyst for this; I do not believe a poor growth number out of, say the US, would be enough for this. It would likely have to come from the Euro zone, whether that is a disorderly Greek default or a debt market run on Italy, Spain or worse still, France. In this scenario, a repeat of what happened in 2008 is conceivable. It does not remain our base case, as I have said, a generally robust earnings season so far has helped consolidate expectations. This will likely help equity markets rally further, if European policy-makers or rather if investors believe that European policy-makers take the necessary steps to get the European debt crisis under control.
4) How do you assess the prospects of your region during the forthcoming economic realities?
I have been a perennial bear on the UK. We are in the midst of a period of stagflation and UK citizens are really feeling the pinch. All it takes is a short trip outside of leafy suburbs of London to see the effect that lower incomes and higher prices are having on everyday life. The government is in a tough position as it is forced to keep its fiscal house in order on the one hand but is looking to do this by pushing through severe austerity measures, which are clearly having a negative effect on growth prospects. The UK is also significantly exposed to real economic shocks in the Euro zone, something which the BOE governor Mervyn King alluded to when announcing the banks latest easing measures. So although in the environment we have looked into today it is very much a relative out or underperformance basis, the UK would inevitably or indeed already is suffering.