While MPs were readying themselves to usher Theresa May’s doomed Brexit deal towards its inevitable defeat this week, a mile or so further north-west the bears were on the prowl.
If you’re feeling nervous about life, best to avoid Mayfair in early January. Société Générale’s annual Bear-Fest, led by grizzly-in-chief Albert Edwards, played to a relatively full room, reflecting the downbeat mood of its fund managers and hedgie clients.
Worryingly for us — and the Leavers preening themselves about the opportunities of “Global Britain” in the debate on the withdrawal agreement — the B-word was hardly mentioned. The world we could cast ourselves into within 10 weeks if we don’t get a deal has enough issues of its own without little old Brexit, and the mood is one of darkening economic gloom.
Environment Secretary Michael Gove gets it, with his Game Of Thrones-style “winter is coming” rhetoric, unlike too few of his colleagues. Maybe they should have popped along.
The French bank’s famously bearish stance has been proved wrong many times in the past, but it always has an array of panic-inducing charts to back up its arguments.
Take the US, where the Federal Reserve is pushing up rates. Their view is that recession is a real risk, as 10 of the last 13 Fed tightening cycles have ended up in an economic contraction. Trump’s tax cut stimulus, which kept the US motoring while other economies slowed, is fading fast and chief executive confidence is down.
Meanwhile, corporate debt has grown to astonishing levels, putting their borrowings close to a peak towards the wrong end of the economic cycle. The Fed helped to fuel the debt boom and rising share prices with quantitative easing. But QE is turning into quantitative tightening — sucking money out of the financial system, while the European Central Bank has also called a halt to its own money-printing programme. The Fed has barely begun unwinding the $4 trillion-plus on its balance sheet and we’ve already seen big reverberations in markets. Without the go-go juice from the central banks, share valuations have been tailing off.
Edwards’ colleague, the equities analyst Andrew Lapthorne, also points out that 60% of global stocks in the 3100-strong FTSE World Index are now in a bear market, down 20% or more from two-year highs.
If the world’s biggest economy is facing tougher times, things don’t look much better for its trade war rival China. Again there’s plentiful evidence on falling industrial profits, sliding manufacturing activity and a struggling labour market. The biggest private- sector collector of data on its firms, the China Beige Book, says the economy “is deteriorating and risks heading for a much weaker 2019”.
Though the Chinese government has unveiled stimulus measures, Bank of England Governor Mark Carney also pointed out to MPs yesterday that China — 15% of world GDP — is likely to slow further this year, and reforms to its shadow banking system could potentially damp the transmission of stimulus to the real economy. The economic risks are a sobering counterpoint to the words of Brexiteers such as Dominic Raab, our putative future PM who “aspires to something better and something brighter” and voted for the “temerity to regain mastery of our own destiny”.
Cast adrift alone on choppy global seas, No Deal Britain looks anything but.
Better barriers than Trump’s wall
In less than two weeks, the $1 billion-a-week cost of the US government shutdown will deliver a bigger hit to economic growth than the cost of the infamous border wall that caused the row in the first place.
“We’re gonna build a wall” was Donald Trump’s tub-thumping campaign refrain and — despite what he now claims — Mexico was going to pay for it. But the people who’ll really pay for his latest act of economic vandalism are the higher-skilled workers in his own country.
How can we tell? The US has previous in this regard under a marginally less unpopular president, George W Bush. His Secure Fences Act in 2006 built some 550 miles of fence along the US-Mexico border in California, Arizona, New Mexico and Texas. That brought the fencing on the border to 658 miles, or around a third of the 1954-mile boundary with the US’s southern neighbour.
The cost was some $2.3 billion, or $7 for every person in the US, according to a trio of US economists who looked at its effect, Treb Allen, Caue de Castro Dobbin and Melanie Morten. Over a three-year period, immigration came down by 0.6% but the researchers’ model found the deterrent effect on Mexican low-skilled immigrants pushed up the annual income of lower-skilled US workers by just 36 cents overall. Higher skilled US workers — now relatively less scarce — lost $4.35 on average. Ironically the economists found that cutting trade costs by 25% might actually reduce migration — by making Mexico more prosperous, and while increasing the wealth of US workers. Not that Trump cares.