- I think that the US economy is likely to improve a bit in the second half (absent new and unforeseen shocks). I think the slowdown in the last few month's data was primarily a function of the high energy prices in the spring. Those in turn were caused by turmoil in the Arab world and actual loss of Libyan production. I expect global oil production will resume growing now (perhaps slowly and fitfully) at least for a bit.
- I think the Republican ploy over the debt limit has probably caused a significant hit to confidence and aggregate demand in July/August. However, people will forget after a short while. The actual agreement seems to be only very mildly contractionary in the near term and in the medium and long term it is all subject to renegotiation anyway. There's probably some lasting damage to investor confidence that might cause some relative shifts in the prices of different asset classes but not have a big impact on the real economy.
- The US fiscal picture continues to be very unsustainable in the medium term, but I don't think we are close enough to the edge of the precipice for it to cause serious economic damage this year or next.
- Large US banks seem broadly sound.
- In the absence of specific reasons to contract, the economy will tend to revert to its natural tendency given enough resources - to grow. I would be surprised to see an out-and-out recession in the US now.
- However, I think the US recovery will continue to be basically jobless as companies continue to invest in more technology as a substitute for hiring. I don't expect to see much if any improvement in the employment/population ratios. I don't expect the highly polarized political system to be able to come up with anything that has any impact on this.
- Europe still seems to be in a world of trouble to me. Now that Spain and Italy have lost bond market confidence to the degree that they have, I don't see how this can get better without getting a lot worse first. It's going to take heroic efforts to avoid a complete break-up of the Eurozone, and the current political leadership has certainly not shown any sign of the necessary courage and ability - at every stage, they've shown an uncanny knack for doing too little, too late. It's hard to see how the worsening crisis doesn't eventually lead to an outright Eurozone recession.
- The implications for the rest of the world are complex, however. A loss of European demand will tend to be a drag on other economies. On the other hand, in a resource constrained world it may tend to moderate resource prices (particularly oil) and in turn allow a little more room for everyone else to grow before triggering the next energy price shock.
Your thoughts welcome in comments...