THE WORLD ECONOMY IS STARTING TO LOOK A LOT LIKE THE TITANIC, HSBC CHIEF ECONOMIST WARNS

The world economy is starting to look a lot like the Titanic, HSBC chief economist warns

Real Thing TV

Published on May 14, 2015

The world economy is starting to look a lot like the Titanic, HSBC chief economist warns.

Like the ill-fated White Star liner, the global economy is sailing across the ocean with too few lifeboats and an iceberg looming on the horizon, warns HSBC chief economist Stephen King.

And that’s going to be a titanic problem for global policy makers.

It’s been six years since the last U.S. recession and though they don’t come like clockwork, King says we are closer to the next one than the last one.

But unlike past downturns, the weak recovery from the last recession has not allowed monetary policymakers to replenish their arsenals.

The chart below shows the average annual U.S. growth rates during the six years after a recession over the past 40 years. The latest recovery is particularly weak, King notes.

Budget deficits are still huge, debt levels too high and while the U.S. economy has improved it’s far from top form.

In every recession since the 1970s, the U.S. Federal Reserve’s key rate has fallen by a minimum of 5 percentage points. With rates now at 0 to 0.25 per cent, there’s no way that can happen.

HSBC Global Research also lists in its report Wednesday four suspects that could cause the next recession:

1) Higher U.S. wage costs along with weak productivity leads to falling profit share in GDP which triggers a collapse in stock prices. This leads to a loss of consumer confidence and then economic contraction. “Put another way, another equity bubble bursts.”

2) A growing series of failures in non-banking financial services as pension funds and insurers find themselves unable to meet future obligations. These trigger a demand for liquid assets which leads to panic selling and then collapse in demand.

3) “A recession made abroad, not at home:” China’s economy weakens to the point where Beijing must let the renminbi slide. The ensuing collapse in commodity prices weakens other countries. The dollar surges but the Fed cannot respond by lowering rates. “The U.S. is eventually dragged into a recession through forces beyond its control.”