Carrick commented that economic slowdowns have a habit of becoming ‘self reinforcing’, that is once a slight downturn happens, it tends to percolate throughout the rest of the economy, causing a deeper decline.
The economist has examined in some detail the lending conditions in the US, and remarked that while corporate profits are flat, bad loans are increasing, and interest rates are likely to rise in the coming months. Wages are also not really growing.
If the cost of repaying debt goes up, but wages and profits are not rising, then bad loans will increase.
He asserted that banks response to seeing an increase in bad loans is to cut the amount it lends into the economy. This cut in loans impacts on those consumers and companies that are a good credit risk, as well as those that are not. Carrick believes that the increase in bad loans will come from the defaults in the oil and gas sector.
Thriving companies being unable to borrow impacts on their ability to grow, slowing down the rate of economic growth, of employment growth, and of wage growth. That slowdown in turn means that more borrowers find it harder to repay loans, particularly is, as is almost certain, the US Federal Reserve increases interest rates in the coming months.
Many market participants who are positive on the economic case for the US contend that the sluggish profits being achieved are simply a function of the collapsed oil price, and shouldn’t be taken as a comment on the rest of the economy.
Carrick countered that in the lead-up to 2008, analysts noted that corporate profits were starting to decline but said it was a function of the banks, and it didn’t stop a recession.
He continued that there was a slowdown in corporate earnings in 2000, with many declaring this as simply a consequence of the slowdown in technology stocks, but it later caused a genuine recession.
Carrick contended that with the US in an election year, and a slight recovery in the oil price, will give the US economy enough of a boost to prolong growth in the near term.
The record low interest rates that have propelled the global economy since the financial crisis, should, according to Carrick have led companies and individuals to refinance, to borrow at the current exceptionally low interest rates, and be protected from future rate rises.
But Carrick’s analysis contended that borrowers have not actually done that, have not refinanced, and so will be vulnerable to future rate rises. Policy makers are faced with a dilemma similar to one they faced in 2007, if they raise rates they must deal with a potential deterioration in credit conditions, if they do not, one gets excess inflation.
Carrick opined that if a recession happens in the US, ‘it will take the rest of the world down with it’, but added that, if the current data holds true, the recession will be more akin to 2000-1, where most of the pain was felt in the corporate sector rather than the real economy, as opposed to 2007, where the downturn was more far reaching.