Why the Threat of Recession is Resurfacing

Panic on the markets around the world shows investors’ anxiety: growth is showing signs of weakness while the issue of debt in Europe has not even begun to be addressed.

The fear of the economy taking another dive resurfaced today. Known for his pessimistic views on the global economy, economist Nouriel Roubini estimated the risk of “double dip” — that is to say, a return to recession — to be at 40 percent. Even if this scenario that was already mentioned last year did not unfold, the current situation shows worrying signs. Recovery plans have failed to deliver results, and the engine of the U.S. and European economies seem to have trouble running on their own. The poor growth rate now seems to be a threat that is so great that the indebted Western states can no longer afford to come to the rescue with new recovery plans if things get rough.

A Series of Alarming Statistics

The alarm was raised in recent weeks with the publication of sharply lower leading indicators. These statistics allow us to feel the pulse of economic activity before the publication of official statistics, always on the off-beat. The most consistent indicator is the Purchasing Managers Index, which measures purchasing managers’ sentiment. In practical terms, each month investigators ask businesses if they have bought more or less industrial supplies, for example, than the previous month.

The PMI indices in the U.S. and in the euro zone are on the verge of decline (50.9 points in July for the first, 51.1 for the second in June). The same indicator for China reflects a decline in activity below the 50 point mark, at 49.3 points, which is also very concerning. However, Hong Kong and Shanghai Banking Corporation, the bank that publishes this index, puts the seriousness of the situation into perspective: even if an indicator below 50 reveals a contraction from one month to another, production is up from 11 percent to 13 percent over the period of a year in China.

BNP Paribas fears that all that remains is for the euro zone to join the Asian giant below that fateful 50-point mark in the coming months. Business in France and Germany — the main drivers of European growth — has indeed slowed down, while in the peripheral countries (Greece, Portugal, etc.) indicators are already showing signs of a recession.

“The deterioration results from several factors: weakened global growth, a situation full of uncertainty and, above all, renewed tensions in the markets,” analyzes Ken Wattret, economist at BNP Paribas. “In this context, past crises have taught us that periods of great uncertainty and market pressures are accompanied by very low investment by business.”

The European Central Bank is Optimistic, the Markets are Not

Despite everything, Jean-Claude Trichet, president of the ECB, was trying to be optimistic Thursday. He believes that “we could see very strong growth in the fourth quarter” in the euro zone. Even if “the second quarter is significant, of course, much less buoyant than the first quarter, which was absolutely exceptional,” he added. Economists, on the other hand, see a much greyer horizon. In the euro zone, BNP Paribas is banking on growth that was halved in the third quarter to 0.4 percent, and then a “modest recovery” to 0.4 percent by year’s end.

The latest statistics released Friday in the euro zone are showing contradictory signs. German industrial production fell 1.1 percent in June. In Italy, business that was sluggish at the start of the year has modestly recovered in the second quarter to 0.3 percent. However, Spanish growth slowed from 0.3 percent in the first quarter to 0.2 percent in the second.