MY ANNUAL BUDGET OUTLOOK WILL BE PUBLISHED NEXT WEEK
Next week, I will publish my annual Budget Outlook, covering the 2020-2022 period. The aim, as always, will be to challenge conventional wisdom when this seems to be heading in the wrong direction.

Before publishing the new Outlook each year, I always like to review my previous forecast. Past performance may not be a perfect guide to the future, but it is the best we have:

The 2007 Outlook ‘Budgeting for a Downturn‘, and 2008′s ‘Budgeting for Survival’ meant I was one of the few to forecast the 2008 Crisis.  2009′s ‘Budgeting for a New Normal’ was then more positive than the consensus, suggesting “2010 should be a better year, as demand grows in line with a recovery in global GDP“.  Please click here if you would like to download a free copy of all the Budget Outlooks.

LAST YEAR’S OUTLOOK WARNED OF KEY RISKS TO THE ECONOMY AND BUSINESS
My argument last year was that companies should be ‘Budgeting for the end of ‘Business as Usual‘:

A year later, this view is starting to become consensus:

  • Global auto markets are now clearly in decline, down 5% in January-September versus 2018, whilst the authoritative CPB World Trade Monitor showed trade down 0.8% in Q2 after a 0.3% fall in Q1
  • Liquidity is clearly declining in financial markets as China’s slowdown spreads, and US repo markets confirm: Western political debate is ever-more polarised
  • The US$ has been rising due to increased uncertainty, creating currency risk for those who have borrowed in dollars; geopolitical risks are becoming more obvious
  • “Bubble stocks” such as WeWork, Uber and Netflix have seen sharp falls in their valuations, leading at least some investors to worry about “return of capital”
  • The ongoing decline in global chemicals Capacity Utilisation, the best leading indicator for the global economy, suggests recession is close. This will lead to bankruptcies in over-leveraged firms and to major downgrades in the BBB corporate bond market

The rising risks in the US repo market confirm the concerns over the level of debt in global markets.

Developments over the past month suggest New York markets are now systemically short of overnight money, with the Fed’s balance sheet suddenly starting to expand again. It was $3.76tn on 4 Sept, but reached $3.97tn on 16 October, a $210bn rise in just 5 weeks.

It is therefore looking more and more likely that we are at the start of a  global debt crisis.

The last 10 years have proved that stimulus programmes cannot substitute for a lack of babies. They generate debt mountains instead of sustainable demand, and so make the problems worse, not better.

Unfortunately, they also have a political dimension, as they encourage voters to listen to new voices, such as the Populists, who offer seemingly simple solutions to the problems which have been ignored by the elites.

The one redeeming feature of the 2008 Crisis was that global leaders did at least manage to come together to restore financial liquidity.  It is hard to be confident that this would happen again, if a debt crisis does begin.