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The Ghost of Recession

28 June 2019

 Salomons Judgement

Everybody talks about a recession. Interest rates are looking for new record lows. It will be exciting. Keep a close eye on what companies and consumers do, rather than what they say.

A few weeks ago, I made the bet that this cycle would at least last for another year. Since then, interest rates have continued to go down, both the American and European central banks are ready to lower interest rates even more and economic data is weakening.

Did I make a wrong estimation? The time has come to quote the famous Keynes: ‘When the facts change, I change my mind. What do you do Sir?’ The moment isn’t here yet, but in the coming weeks I will keep a close eye on two things.

First, it’s important that the central banks stimulate the economy. Unfortunately, lowering rates even further will not help much to boost economic growth in Europe. That is why Draghi made a point in Sintra to highlight the role of fiscal policy.

In the United States, on the other hand, monetary measures have an immediate stimulating effect when bond market rates fall, as the interest on mortgages will go down immediately. Mortgage refinancing practically costs nothing on the other side of the pond. A cheaper mortgage gives the American consumer extra disposable income.

In addition, the behaviour of companies is crucial. Are expectations being set back? Are investments going down? Is personnel being fired?

Many companies indicated earlier this year that they expect recovery in the second half of the year. When the numerical season starts in mid-July, the business community will show its true colours. Some companies have already become more cautious, for example by not renewing temporary contracts. It is not yet a trend, but it is worrying.

Slowly, caution is an asset. However, as I recently stated in an interview with CNBC, it is quite expensive to be too careful. With the current low interest rates, investors need more bad news to really get nervous.

Anyway, the readers of my column know what makes me nervous in the near future. If Americans don’t refinance their mortgages and companies become cautious, I will write a column in which I will quote Keynes.

The author

Roelof Salomons

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