Recession, what recession?

While we at Awbury are not professional economists (Discuss: “Is economics a profession, vocation or discipline?”), naturally we pay very close attention to economic matters, as they can have a material impact on not only our existing book of business, but also on our appetite for and pricing of new E-CAT business.

The R-word is beginning to creep back into the collective consciousness, as a result of a perceived slowdown in the Chinese economy; the knock-on impact of the decline in oil and natural gas prices; evidence of decline in volumes of cross-border trade; policy disorder in the EU; “Brexit” risk; US political dysfunction…One could go on!

Linked to the rising concern about the risk of recession in the US and other major economies, is one that questions whether the world’s major central banks, having been seen as “propping up” demand through the use of ultra-low interest rates; quantitative easing and suspicions of sovereign-debt monetization, still have the means at their disposal to steer their economic charges away from the recessionary abyss. There is even talk of “helicopter money”.

So, when fear stalks the land, it is worth pausing and trying to assess what exactly the word means and when it matters.

After all, it is worth pointing out that recessions and recoveries are a normal part of the economic cycle across recorded history, as “animal spirits” and “irrational exuberance” give way to existential despair. The Great Moderation was an anomaly and a Chimaera. The world economy is complex, interdependent and prone to periodic fits.

Secondly, what exactly is a recession? As usual, economists cannot agree. Is it two consecutive quarters of real decline in GDP, or growth over the same timeframe that is 2 percentage points below a country’s trend (as suggested by Robin Harding)?

Clearly, many middle eastern economies, whether because of turmoil or the impact of depressed oil and natural gas prices are in recession. The same applies to Brazil and Russia. As for China, the argument is about the true level of GDP growth, not outright decline; and India is certainly not in recession. Japan and Germany are not exactly growing fast, but they are not in recession; nor is the UK.

In reality, the world’s economy is like the proverbial curate’s egg- good in parts; and it is naïve and counter-productive in any assessment of the risk to make sweeping judgements simply because it seems easier. As always, one should examine the particular factset and specific risk one is being asked to structure, price and accept; and then, as part of a rational and informed analysis, determine the extent to which the nature and quality of the risk will be impacted by declines in economic output in a particular economy or sector. Clearly, there is a big difference between the current outlook for a manufacturer of oil drilling equipment, or a shipyard producing dry bulk carriers, and that for a large-scale food and pharmaceutical retailer in, say, the US, or Germany. In other cases, say in Brazil, the rate and breadth of decline impacts a much broader swathe of economic output. As usual, it all depends on the specific risk; not some unreasoned expectation.

At Awbury, we are always surveying the “horizon” for potential risks, or the potential changes in the level of existing ones. However, we have learnt from long experience that all one can expect is that economic cycles will continue, and that it is very dangerous to over-generalize, or “assume”. As always, targeted, properly-informed analysis is what matters.

The Awbury Team


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