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Bond Outlook June 24 2009

If the savings rate has moved from -2% to +6% and industrial capacity usage has dropped to 65%, can the official drop of 3% in GDP be correct?

Bond Outlook [by bridport & cie, June 24th 2009]

The flu (i.e. the financial system) is being cured, but where does this leave the patient with lung disease (aka the economy – see last Weekly). The answer seems to be “still in a pretty bad state”. John Mauldin has highlighted work by both US and Irish universities tracking the current recession against the Great Depression on a global basis (as distinct from the USA alone). Measures of GDP, trade volumes and stock markets are, at best, echoing similar data for 1929 onwards, and are sometimes even worse.

In many regards it is a good thing to have dealt fairly well with the “flu”. It might help both governments and investors focus on the real problem. We have described this problem in various ways (always incorporating the concept of “spending beyond one’s means”). Without contradicting any previous descriptions, today we shall use the expression “settling down” to reflect a more sustainable economy, with GDP in developed countries several percentage points below pre-recessionary levels.

The thesis put forward here last year that the recession is “L-shaped” is gathering wider acceptance.

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