The Daily Update - 'Why Do Economic Expansions End?' Part V - The End Game

Banks do tighten lending standards for other reasons, of course. Borrowers become too big a risk for a host of reasons ranging from debt burdens being too great to cash flows being too little. I expect to see a rise in loan defaults and delinquencies in the years ahead. Yet, neither of those warning signs have reared their ugly heads. So, banks have had little reason to cut back on corporate or household lending, and in fact have been relaxing lending standards on balance over the past year. That virtuous circle is destined to end, especially with signs of a global slowdown spreading. In that context, it is worth contemplating the root causes of what is weighing down global growth – namely, an unprecedented overhang in income and wealth inequality that has created a savings glut, imposition of tariffs and other conflicts that hinder global trade and pose barriers to capital mobility, and the dearth of value-adding investment opportunities in a world besot with excess capacity and political gamesmanship.

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Away from Bob's final piece, we took note of a Handelsblatt newspaper report saying the German government has slashed expectations for gross domestic product growth for this year to just 1%, as opposed to the 1.8% that it was expected just 4 months ago. There were several reasons for the downgrade, from a slowing global economy to Brexit. The report did state that the government expects growth in 2020 to pick up to 1.6%. In 2018 the German economy grew by just 1.5%, the slowest in 5 years. The outlook of 1% is in line with the IMF’s view of 1.3% (down from its earlier forecast of 1.9%) and the Ifo institute view of 1.1% GDP growth.

The report comes on the back of recent German economic figures that have been disappointing. The ZEW, which is a monthly survey of approximately 300 analysts and economists showing the balance of optimism on the German economy, came in earlier this week at just 27.6, far below the market's expectations of 43. We also noted that the PMI and IFO data also missed by a margin.

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