August 5th, 2011
05:50 PM GMT
As a child my mother would lure me home from the playground with the promise of a "Double Dip." Now the mere mention of those two words is enough to send me running fast in the other direction.
The term, once synonymous here in the UK with a tasty sherbet sweet, is now a household name for the bitter pill some of the world’s richest economies may soon have to swallow as investors become increasingly concerned about a return to recession.
So what are the chances of a contraction?
Bank of America Merrill Lynch economist Michelle Meyer argued this week that the U.S. is just "one shock" away from seeing its economy shrink.
Investors got a shock of a different nature on Friday with word that the world’s largest economy created more jobs than expected. Markets rallied for about an hour before giving up their losses, a phenomenon often referred to as the "dead cat" bounce.
Despite the buoyant jobs numbers economists like Meyer are becoming increasingly concerned that the signs on the upside are not frequent or significant enough to rule out a contraction later on in the year for the U.S., especially as biting inflation eventually pushes the hand of rate setters at the Federal Reserve.
True, U.S. gross domestic product did increase 1.3% in the second quarter but that was much weaker than anticipated.
The previous quarter’s growth was also sharply revised downwards: from a robust 1.9% to just 0.4%.
And when America sneezes, the rest of the world catches a cold.
If there’s one thing that has me more worried than an anaemic recovery state side, it is the bleak future of the euro zone.
Some 17 countries share the euro as their common currency and through thick and thin (thus far) their leaders have vowed to defend it. The money is used by more than 300 million people and prices more than a quarter of world trade.
But the political will is waning, the bills are mounting and cracks are appearing between those countries setting the economic pace in Europe and those who simply can’t keep up.
The world’s bond markets are worth an estimated $80 trillion, a large portion of which is made up of borrowings issued by euro zone sovereign nations.
Fighting a battle on that scale is expensive, especially when you don’t all see eye to eye.
The French president Nicolas Sarkozy and German chancellor Angela Merkel will late on Friday urgently discuss their options this weekend, presumably from their holiday retreats.
This has left EU Economic Affairs Commissioner Olli Rehn holding "the reins" and even he acknowledges that the euro area must match its political cohesion with equally homogeneous and tough fiscal rules.
Mind you, that’s easier said than done when your cultures are different, your populations are of different ages and crucially, your growth rates are going in the opposite direction.
In 2008, we had a credit crunch, when banks wouldn’t lend to individuals. Now we are seeing a debt crunch when entire countries find it hard to borrow.
It’s hard to say which one is worse. Still, what is becoming clearer is that even if we do avoid a double dip, the gap between economic indicators and expectations is growing and that is why the markets are losing confidence.
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