“Lehman’s on steroids” – that was former Treasury Secretary Larry Summers colourful assessment of what would have happened to the US economy if politicians had not agreed on raising the US’ debt ceiling at the end of July.
The (albeit vague) possibility of an American default was of course narrowly avoided at the 11th hour but the spectre of the 2008 Lehman’s collapse and the subsequent financial crisis still looms large in the memory.
An almost daily flow of negative global economic data, political procrastination over how best to resolve the sovereign debt crisis and ongoing stock market volatility appears to suggest that the global economy is once more teetering on the edge of the abyss.
So will we come to look back on the collapse of Lehman’s and the downturn of 2008-2010 as the warm-up act to a far greater downturn in 2011?
Commentators are divided but almost all agree that growth amongst Western economies is insipid (at best) as Governments’ implement austerity measures in order to pay down debt. Add to that the ongoing fallout from the twin effects of the Arab spring and the worst earthquake to hit Japan in a century and a half, and one could be forgiven for thinking that we are hurtling over the precipice once more.
Indeed, parallels with 2008 abound, from the ban on the short-selling of financial stocks implemented in European countries in August 2011 to Gold’s inexorable rise, the spike in the Vix index (Wall Street’s so-called “fear gauge”) and even rumours that Bank of America is heading for the wall.
However, before you reach for the tin hat, there are three very good reasons why one shouldn’t confuse August 2011 with September 2008.
For starters, the European banking sector is much better capitalized and less dependent on short-term liquidity than it was back in Autumn 2008. As a result, although banking stocks have plummeted since the start of the year, this is as much a reflection over the concern over even harsher banking regulation than a vote of no confidence in the state of the global economy.
Second, corporates that cut costs and restructured as a result of the 2008-2010 downturn continue to report strong earnings while, at the same time, reducing net debt and shoring up their balance sheets (whisper it quietly but even M&A activity has recovered slightly).
Thirdly, growth in emerging markets continues to power ahead, a trend that increasing numbers of UK corporates, from Diageo and Unilever to WPP and G4S, are eagerly tapping into.
So, to paraphrase Mark Twain, reports of the global economy’s death are greatly exaggerated… just don’t mention the possibility of a hard landing in China, Italy’s CDS spreads or Nouriel Roubini’s track record on predicting global downturns…