The global economy has been struggling to recover since the banking crisis exploded in late 2008 and the USA has had its share of problems. Although the recession officially ended five years ago the economy hasn’t returned to where it was before the credit collapse and growth has been disappointing. Many analysts have been predicting that the end of the rough stretch is finally in sight but recent indications are that this might not be the case quite yet.
Consumer spending is the key driver of recovery and, after a 0.2 per cent slide in April, it dropped another 1 per cent in May. After a disappointing Q1 rise of just 1 per cent, mostly down to the severe winter, shoppers had been expected to start spending freely once the weather improved and that hasn’t happened. Personal income is rising but so are food and energy prices, and it’s likely that’s putting a damper on consumer confidence. With shoppers worried about the price of essentials they don’t seem to be spending on luxuries.
Thanks largely to weak spending growth figures are being revised down across the board. Last year the economy expanded by 2.6 per cent; HIS have now slashed their prediction for this year to 1.6 per cent and that may turn out to be optimistic, as the economy actually contracted by almost double that in the first quarter of this year. Many economists are relaxed about that decline but others think it’s too large to be written off to bad weather. Growth has been modest since the economy began pulling out of recession and it’s still too fragile to be sanguine about a shrinkage of that size.
There are signs that underlying credit availability might be starting to tighten and one area that’s showing up is in mortgage lending. Stung by the toxic loans that helped cause the 2008 crisis many banks overcompensated, and their reluctance to lend is taking a long time to fade. This is keeping the housing market relatively depressed. If credit contracts more generally there will be knock-on effects on investment and manufacturing. At the same time the Swiss-based Bank for International Settlements is urging central banks not to hold interest rates down and risk an explosion in personal and corporate debt. The BIS is known for skepticism about stimulative policies and this isn’t a new refrain from them, but increasing the cost of credit could be just as damaging as reducing its availability right now.
There are some bright spots. Household debt is generally low while average wealth continues to rise. If consumers can get over their lack of confidence the pieces are in place for an upswing in spending, and that would drive growth in the right direction. Some analysts expect the inflation that’s affecting the price of necessities to ease off in the next few months, which would certainly help. The sustained fall in unemployment is also a positive driver. If this year’s predictions to date show us one thing, though, it’s that it’s too early to say the recovery is here to stay.