It looks like the risk of going back into recession is increasing. The economic data coming out of the US is disappointing and the European debt drama is not helping as contagion will certainly reset the financial system a la 2008, except uglier.
Less than a month ago Credit Suisse still believed the global economy will expand 4.1% in 2011 (a lower revision than the 4.3% they had in May). I’ve always followed these figures closely especially for Asia as they are the main drivers in oil demand due to their robust growth.
But here we are with a set of cuts starting with Morgan Stanley cutting its forecast for global growth down to 3.9% from its previous 4.2%. China’s forecast was cut down to 8.7% from 9%. The US growth rate was also cut down to 1% (from 2.5%) for Q4-11 and a measly 0.5% (down from 1.5%) for Q1-12.
That doesn’t stop India from targeting 9% economic growth for the next 5 years. You should also note that the growth in China and Asia in general (excluding Japan) is still stellar compared to the US and Europe. While I always held to the view that emerging economies will support oil prices and the world economy, there’s a chance the stagnating economies of the US and Europe might well end up sinking the global ship thanks to political indecisiveness in tackling the debt problems.
According to Bloomberg, The S&P’s PE ratio is down to 12.2, the lowest since March 2009 and below its average of 16.4 (calculated since 1954). Corporations are cash rich, profits have been decent and then you have Buffett buying all he can:
“I like buying on sale,” said Buffett, Berkshire’s chief executive officer. “Last Monday, we spent more money in the stock market buying than any day this year.”
Finally, we have a bunch of strategists at Barclays Plc, Citigroup Inc. and JPMorgan Chase who believe the S&P 500 will continue to push higher by the end of the year. While Goldman Sachs Group Inc. cut its year-end target for the S&P 500 to 1,400, Barclays held its 1,450 estimate.
Are we going back into a recession triggered by fear or by the debt crisis blowing up? Is this just a transitory weakness until a haircut is given to holders of European debt? I wish I knew….
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Have a great Weekend