Markets still turning away from reality

Mar 27 2008 by Peter Jackson, The Journal

PEOPLE are warning that we must be careful not to talk ourselves into a recession. I don’t think there’s ever been a recession that has been talked into existence and I think such warnings make about as much sense as saying we mustn’t talk ourselves into global warming or a bird flu pandemic.

The one simply does not cause the other.

Furthermore, some of the economic news is now so bad it would be perverse to ignore it – although the stock markets seem to be doing their best. Take house prices: our economic boom of recent years was based on the housing market and that is where it is ending. So, in the US house prices have fallen by a fifth in just two months and in the UK last month the number of house buyers on estate agents’ books dropped by 12%, while the gap between asking prices and actual sale proceeds widened to 4.5%.

Just as rising house prices fuelled consumer spending in the boom, now falling house prices are undermining consumer confidence. A recent survey shows US consumer confidence at its weakest for 34 years, while in the UK a YouGov poll reveals more than half of those questioned believe their financial situation will worsen next year.

And there are signs that this is beginning to work its way through to the so-called real economy. The CBI has lowered its growth projections for this year, by 0.2% to 1.8% and it has lowered its forecast for 2009 to 1.7%.

The CBI has now lowered its growth projections for this year for four consecutive quarters and in this mirrors the revised forecasts made by various economic analysts over the past 18 months, with an inflation of language as we see a deflation of economic hopes.

First the consensus seemed to be that the economy would have a “soft landing”, then we were told there might be a slowdown, but we “definitely weren’t talking about recession”. Then on Tuesday I read one respected analyst who wrote: “Slowdown, even recession this will be. Yet … there is no need for this to be a depression.”

Not, I repeat, that this language fuels the problem, it is only a symptom of it.