Double Dip Recession Now Assured?

With investors facing yet another summer of discontent, one economist has looked back in time for clues on how the following months may place out.

With one major banking crisis behind us, Monument Securities Chief Economist Stephen Lewis said investors only need to go back to 2007, rather than the Great Depression, for clues on how the current problems may play out.

"Sharp changes in credit market conditions can have a much more profound impact on business activity than most economic forecasters are prepared to recognize" Lewis said.

He warned that people missed the scale of the problem in 2007 and could do so again.

"It is tempting to dismiss distress in those markets that are far removed from the productive sectors of the economy as having little bearing on prospects for GDP growth," he said " We ourselves were, to a large degree, guilty of assuming that in 2007." .

With globalization bringing so many markets closer together, Lewis suggested that links between one part of the system and another are not always obvious.

“It is sometimes difficult to trace, accurately and comprehensively, the transmission channels between a specific segment of the credit market and the wider economy," he said. "Then again, threats emanating from the credit markets may lie dormant for months, it seems, before their full severity becomes apparent."

What Next?

Investors should be prepared for mid-June to August to be very volatile, as governments across the world attempt to raise money in a crowded market, one leading investor told

Problems in the euro-zone debt market could spread to the US and begin to impact states such as California and New York, this investor predicted.

With so much debt needing to be refinanced, US rates would have to rise to attract enough foreign buyers of Treasurys, which could then push the economy back into the dreaded double-dip recession.

And investors may now be failing to take into account the impact of the current credit crisis on growth predictions, Lewis said.

“The lag between financial turbulence and economic damage may be fairly long, of the order of a year or more," he said. "In the meantime, the economic indicators may remain positive. The US economy did not enter recession until December 2007, five months after the early signs of trouble in the credit markets."

"Other advanced economies did not begin to display negative trends until well into the second quarter of 2008,” he added.

“If sovereign debt concerns are accompanied by worries over bank liquidity, any more significant than those currently influencing the credit market, another dip in world economic activity would seem a sure thing,” he said.