Rosenberg on Heightened Political Risks, US Economic Downturn

Mon, Oct 31, 2016 - 4:42pm

While some economic data has improved this year, David Rosenberg of Gluskin Sheff questions the likelihood of a sustained cyclical upturn and cites specific political risks in the weeks and months ahead, which could rattle the markets.

Recession Isn’t Imminent, But Growth Is Weak

In a recent interview with FS Insider, Rosenberg said there’s nothing in the tea leaves to suggest a recession is imminent, but with growth being so weak, some sort of shock could trigger a recession.

This could take the form of a negative shock from abroad, such as a hard Brexit, or fragility beneath China’s GDP numbers becoming apparent. Both could affect US exports. Alternatively, Rosenberg stated, it’s possible the Fed makes a policy mistake, upsetting markets in the process.

“The reality is that we don’t have an economy right now with a big growth cushion like we’ve had in the past,” Rosenberg said.

He sees the underlying trend in the US economy around 1 to 1.5 percent GDP growth, well below previous growth cushions.

Here's a brief clip of what he had to say when asked about the likelihood of a cyclical upturn:

Cyclical Upturn Coming?

This is one call Rosenberg doesn’t find likely.

“I would be fascinated to sit in the classroom and hear the teacher explain to me where this cyclic upturn is going to come from, where it hasn’t come from already?” he said. “This is not a situation like it was in 2010, where we’re coming out of the abyss, and we can have a springboard on growth, and we have the Fed easing policy aggressively, and fiscal stimulus.”

He doesn’t see fiscal stimulus riding in to save the day, either, with the expectation of a conservative, Republican-led house likely tamping down on, rather than raising, spending. Add to this the likelihood of the Fed tightening rather than easing, and Rosenberg thinks policy is likely to provide headwinds for growth going forward.

It would take convincing evidence of a positive exogenous shock that could cause this hypothetical cyclical upturn to change his mind, he said.

“I actually put lower odds of that happening than the prospect that we actually go into a downturn,” he noted.

Political Uncertainty Has Deeper Roots

It probably isn’t just the contentious election season that’s driving uncertainty and a spending freeze, Rosenberg said, but rather the global backdrop of anti-establishment sentiment that’s driving the politics first.

“We have now this backlash against the establishment globally, against the status quo globally,” he said. “It’s not just in the US, but you’re seeing this in Europe.”

According to textbook economic theory, he stated, this backlash against globalization should actually help global growth. However, if this dynamic reverses course, which he thinks is likely, then it’ll add another headwind to the global economy.

“Everything I’m seeing on the political side is actually more anti-growth right now, than it is pro-growth, from both sides of the aisle,” he said.

Monetary Policy Shifting

The status of US politics is hurting, not helping, growth prospects, Rosenberg stated.

“I just see more gridlock,” he said. “People say gridlock is good. In normal times, gridlock is good, but we don’t have normal times; we need leadership. And we do need smarter fiscal policy.”

With political risk also escalating globally, Rosenberg sees headwinds mounting, especially from developments in Europe and China.

Another large threat is the approach of an inflection point on monetary policy. Everything was held together this cycle by central banks’ attempts to reflate the world economy, Rosenberg stated, but what ended up happening is they succeeded in reflating asset prices instead of stimulating growth.

“We’re seeing a real shift here in monetary policy,” he said. “The hope is that the baton will get shifted from monetary policy...to fiscal policy. Right now, that’s a forecast, not a reality.”

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