14 July 2009

SproutWatch - June

First posted on 7 June 2009:

SproutWatch is my occasional blog looking for signs of the "green shoots" of recovery. If I see any sprouting of green shoots, I will mark the occasion with with a green light, but until then we will make do with red and occasionally amber.

Banking crisis: The index is at 0.70% down from 0.77% last week. (See the small print below for an explanation.) A recovery from the banking crisis would mean a number in single figures. So for now we are still on red.

Debt/demand crisis: The Economist forecast for growth in 2010 is 0.6% up from 0.3% last month . If the economy was to recover next year then we should see growth over 2%. So the prospect for recovery soon is a big red sprout from Brussels.

Trade crisis: The trade imbalance is unchanged at 6.3%.

Second derivative
Notice that two of the indicators have improved. They still signal that the downturn will continue, but they are better than last time. This partly explains why some commentators see green shoots and why they are wrong. In maths, this is called the second derivative. Basically the indicators are saying the economy is shrinking, but not as fast as before.

Here is an example from this weeks Economist:"The rich world’s manufacturing slump may be coming to an end." That sounds good. "In America, the Institute for Supply Management’s activity index rose from 40.1 to 42.8 in May..." Good, the index is going up.Then in brackets, "(a reading above 50 indicates industry is expanding)" So a reading of 42.8 means industry is contracting.

Small print
The banking crisis is measured by the risk premium banks demand when they lend to each other. The index is the difference between the interest rate for inter-bank lending (3 month sterling LIBOR) and the policy rate set by the Bank of England.

The debt/demand indicator is the forecast published by the Economist newspaper, based on the forecast of a dozen or so institutions.

The trade crisis indicator is the sum of the trade deficits of the US and UK plus the trade surpluses of China and Germany (on the basis of the latest 12 months for which figures have been published) expressed as a percentage of their combined GDP.

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