“The US recovery is accelerating to escape velocity. In comparison with other major industrialised economies, the US has the Wright Stuff. Unfortunately, the Wright stuff is provided by the Wright Brothers whose inaugural flights of the Kitty Hawk in 1903 lasted between 20 and 59 seconds. We believe that in economic terms, America’s nascent flight will last between 20 and 59 seconds. In other words, the move is likely to be short-lived.
“Growth has been driven by massive easing of fiscal, monetary and forex policy. Two out of three of these policies have started to reverse and we believe that the withdrawal of Fed liquidity and appreciation of the Dollar will continue through the second quarter and will be joined in the second half of the year by tighter fiscal policy.
“The newly omnipotent Barack Obama hasn’t yet provided any hope for deficit reduction, and sadly is unlikely to do so before the mid-term elections in November. However, the fading of the fiscal sugar rush will provide a modest drag on activity during the second half of the year. This suggests that annualised economic growth will peak over the summer and slow through the second half of the year. Moreover, we believe that the slowdown will continue into 2011, with a clear risk of a mild double dip recession during next year.
“Nevertheless, the strength of large companies, both manufacturing and non-manufacturing, should lead to higher production, investment and consumption during the second quarter. Indeed, we believe that the first half of 2010 will be significantly stronger than consensus expectations. Inevitably this growth will be extrapolated from recovery to sustained expansion and from there to a widening global business cycle, encompassing previous laggards such as the UK and Europe. However, such exuberance is irrational. This time isn’t different; activity will be constrained by financial sector deleveraging and regulation. Leverage isn’t necessary for the early stages of the recovery, but is essential to sustain this recovery.”
For Stuart’s full commentary please see his blog at www.ratesviews.com.
These are the views of the author and do not necessarily reflect those of Ignis Asset Management.