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Recession clouds gather on the horizon

Recession is something rarely announced by politicians - it does not sound too good.

And elections are often based on economic well-being, so to tell the nation that a recession is here, or coming, does not bode well for those in office.

During the last recession of 2000, it was hardly mentioned at all by politicians until after 11 September 2001. At this juncture it became acceptable, along with hundreds of thousands of job layoffs. Now we hear some familiar sounds.

That the US economy is going through a "soft patch". Then we hear that the "soft patch" may last a bit longer than anticipated. Oil price rises are one of the reasons why this may be happening but other factors are also involved.

The world economy is currently dependent on the industrialised countries' consumers purchasing goods, especially Americans. Yet the US is one of the countries where rises in oil prices will hit hardest.

Cutting back

This is due to the low amount of taxation levied on fuels. In the UK and France, the taxation is respectively 76% and 71% of the total cost of purchasing fuel, according to the International Energy Agency (IEA).

High oil prices may be one reason
for the US economy's 'soft patch'

Hence oil price rises can be better absorbed. In the US that taxation is only 23%. This low taxation can help consumers when oil is cheap. But when it is expensive, those hikes in price are paid for at the petrol pump, by citizens, businesses and by government.

For example, the city of San Jose in California has already started cutting back on vehicle use for garbage collection and public-utility maintenance.

High fuel taxes have also created a far more fuel-efficient culture in Europe. The US uses 68% more fuel to produce one dollar of gross domestic product than Europeans do.

Also, economies that are reliant on exporting to the US, such as South Korea and increasingly Japan, are also hit twice. Not only does reduced US demand hurt South-east Asian exporters but high prices for these oil-importing countries are a double whammy.

Poor trickle down

Japan "grew" by 6.4% in the first quarter of this year; in the second this had plummeted to 1.3%. The Bush administration has the worst job-creating record in post-war American history.

Despite ballooning growth in banking, energy companies, oil exploration, insurance and defence, these industries have not trickled down their cash to ordinary Americans.

Asian economies depend heavily
on steady US consumer spending

Also, US growth is underpinned by the biggest amount of US government spending per household since the second world war: around $20,000 per household.

Although economists disagree on the exact amount, around half of US "growth" is money spent by the government, received from the taxpayer. All of this contributes to US consumers with less money in their pockets to purchase goods.

Coupled with a substantial rise in costs across the board due to oil price rises, it sets an uncomfortable scene. Just take plastic. In the past year and a half, the price of plastic has moved from $700 a tonne to $1500.

Lacklustre sales

Prices of commodities such as plastics, steel and copper have ballooned. Yet now we have started to see sharp falls or corrections due to an anticipated fall in demand - something 
that normally happens in a recession.

The world economy is entering a
danger zone, say some experts

It does seem, however, that the US Federal Reserve understands what is happening. In its recent September report the Fed said of August 2004 that "household spending was reported to have softened in many parts of the nation, reflecting lacklustre retail sales".

American consumers have also seen their real disposable income slowly turn downwards. In January the growth in disposable income was 5.7%. Then it began to fall, first to 4.6%, then 4.5%, 3.7%, 2.5% and down to 0.8% in July.

But this all comes on the back of an economy that is running record deficits at around $150 billion every quarter. It appears unsustainable. The most recent figures are a stunning monthly record deficit of $54 billion in August alone.

Stimuli needed

Meanwhile, super-cheap lending rates, the purported stimuli to drag the US economy out of recession, have caused Americans to buy Asian goods at record levels and fuel an investment boom in Asia, especially China.

Instability in Iraq has added to
uncertainties in the oil market

Yet that record level of purchase by Americans is based around record household debt. If American consumers could buy the country out of recession, it would set inflationary pressure moving.

More wages would mean more money in circulation and higher interest rates to curb the money supply. But now all the talk is that we have "reached the peak of the current interest rate cycle". In other words, more stimuli are needed to prop up a weakening economy.

Yet already the American economy is propped up by Asian central banks. In order to keep Americans spending their money on Asian goods, the central banks of Japan, China, Korea and others have purchased a stunning amount of dollar assets: $616 billion in 2003 alone, up from $351.9 billion the year before.

Two growth engines

The fear of these Asian governments' central banks is that if the American consumer stops purchasing, then the Asian economies investments will seem like the internet boom of the late 1990s. Much of it will go to the wall.

These fears are already percolating around the edges of economic thought. The US recently announced weaker than expected job growth for September, downgrading the previous month's figure. They have also just announced an additional 15,000 unemployed for September.

A global recession will sooner or
later start to hurt oil producers

The signs are not good. Morgan Stanley's chief economist in New York, Steve Roach, is also verging on the pessimistic about the world economy for 2005. The bank has cut its growth forecasts for 2005 and Roach thinks the world is entering the "danger zone".

While he is not saying recession will occur, he warns that "an energy shock could quickly take global growth near the lower end of that (forecast) range.

"In large part, that is because the world economy currently is being supported by only two growth engines, the Chinese producer on the supply side and the American consumer on the demand side.

"The real problem is that both of these engines are now at serious risk of sputtering."

It is unlikely the world's central banks will be telling people this in the near future.

What do you think? Leave a comment below.

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