Global recession "take two" or did we ever recover from the first? Businesses need to take action now to mitigate against trade credit and political risks still to come
Thursday, June 16, 2011 at 09:47AM By Ron Doyle
There is concern about another global recession, but have we ever recovered from the last one? Despite stimulus packages by most G-8 governments and an Economic Easing Program by the U.S. government, unemployment, the housing markets and consumer confidence have not improved.
Recession is defined as ”two consecutive quarters with negative growth”. Therefore, a recession is over when growth of Gross Domestic Product, GDP, resumes. The fallacy with this statement is that many factors can result in growth. As we have seen in some major resource producing countries, simple price increases or devaluation of the U.S. dollar can lead to material increases in exports. Even in countries that import commodities, price increases also lead to growth. In this situation, GDP can grow without any increase in output of goods or services or most importantly, jobs. Today in countries like China, we are seeing a decrease in production and an increase in inflation. Employers in China are being forced to increase wages by as much as 10-20%. Manufacturing in the United States and Europe has also reduced substantially – as explained by the drop in the ISM Manufacturing PMI. The index dropped from 60.4 to 53.5 in 19 months. May showed the largest drop since 1984.
In North America, consumption accounts for up to 60% of GDP. With manufacturing slowing, even in China, food and gas prices increasing, and housing prices continuing to drop (U.S. housing prices are currently near a 9 year low and the market is expected to sink further before prices start rising only marginally in 2012), do you see consumers leading the world away from a double dip recession? Heavily indebted consumers facing higher interest rates, higher energy costs, higher food prices and job uncertainty, are not going to generate the growth needed to recover. And so… who is?
It won’t be governments around the world. We are in a reverse stimulus situation as governments attempt to fight their deficits by reducing spending through program cuts and lay-offs. These cuts will result in further unemployment, social unrest and reduced consumer confidence. The problem with the last round of stimulus, in most countries, was it involved only short term initiatives that left no long term investment that would continue to produce benefits after the stimulus ended. The stimulus didn’t prime the pump, it blocked the toilet. Denmark is officially in recession. Greece will possibly default, and the USA is at such a political impasse, there is even possibility of it defaulting for a short period.
The politicians that took credit for getting the world out of the last/this recession are not readily admitting how serious the situation is, but investors, importers and exporters are sensing panic as no further options are open to governments. What will be the exact cause of the next recession? Will it be a major default, a bacteria or a virus or the collapse of another bubble? The same players that caused the last “global recession” through high risk financial vehicles continue to be in the game.
We all can see the risks: trade credit and political risks to companies everywhere. Is your business prepared to take action to mitigate risks and their impact or are you waiting until it’s too late?
(Ron Doyle is a founder of Millennium CreditRisk Management – credit and political risk insurance specialists – www.mcm.ca. ICBA is the world’s largest team of independently-owned, specialist trade credit insurance brokerages. Partners combine local service with global coordination to provide credit and political risk insurance solutions for multinational companies.)
Reader Comments (2)
Great post. Another problem with the stimulus was that a lot of it, in terms of the American one, was nearly a third of it came in the form tax cuts. Tax cuts won't help people pay off their debts, if they don't have a job, and for those that do the tax cuts were so negligible that they barely added anything to moneys available for spending. Even had tax cuts not been included I think no one knows what to do right now until debts are paid down and deleveraging occurs.
Credit insurance is often talked about but what matters is not the benefits but the business this sector is generating. Could you update us with the total market of credit insurance and the major players for the same?