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NOMPU SIZIBA: The market narrative these days seems to be that, despite experiencing all-time high inflation and interest rates in the past couple of years, the global economy will likely avoid a recession and experience a so-called ‘soft landing’. Philip Short, who is a co-fund manager at Flagship Asset Management, is not necessarily convinced of that.
Thanks very much, Philip, for joining us. The US economy keeps on surprising us, growing more than anticipated in each quarter, and inflation has been steadily coming down. The US being the largest economy in the world, isn’t that a good sign of a soft landing after everything that we’ve gone through with Covid, then the higher inflation and interest rates phase?
PHILIP SHORT: Yes. I think you’re right. In quarter three in the US we had GDP at 4.9%, which is pretty strong. Coincidentally in 2007’s quarter three we also had GDP at 4.9%, and then we went into a very hard recession with the global financial crisis. So I think that’s all backward looking.
So I think, forward looking, the first thing we must appreciate is that a recession is just a natural part of the economic cycle where you have expansion, you have contraction. And some of the signals that we are seeing at the moment are pointing to a hard landing.
NOMPU SIZIBA: Take us through those signals.
PHILIP SHORT: Okay. If we look, one of the major drivers of a hard landing will be a sharp increase in unemployment. If we’re looking at this whole year, every monthly report we’ve had of unemployment or employment data, it’s beginning [to get] softer and softer, and we’ve had the [US] Bureau of Labour Statistics revising those numbers down retrospectively every month. So that’s where we’re starting to see some weakness.
Where we are seeing some definite signs of further weakness is if you look at unemployment data for temporary workers, which has already gone negative.
And if you look at employment data for young workers aged between 16 and 19, that unemployment number is around 12% at the moment, with the general population unemployment number at about 3.9%. In both those cases for the young and temporary unemployment numbers they always pre-empt a general unemployment number surge.
NOMPU SIZIBA: I was going to say that while there is an expectation that interest rates are going to stay higher for longer, people are talking about interest rates coming down maybe from March onwards next year. Despite that there are still concerns around debt as well.
PHILIP SHORT: Yes. Firstly, inflation data has been softer and interest rates could or would be coming down next year. But if you look historically, in every recession we’ve had rates peaking and then coming down. So even if rates do come down, that doesn’t mean anything with regard to a recession.
It could be that the rates need to come down because we have a recession; that’s probably the thinking there, and that’s how it has happened historically.
Read: US economic data keep coming in stronger and defying forecasts
NOMPU SIZIBA: How concerned are you around the conflicts that we’re seeing – the Middle Eastern one of course and the Russia/Ukraine war? We know what impact that has had on the oil price. That’s still a possible worry, isn’t it?
PHILIP SHORT: It is. But to your earlier point, I think those things can quite easily be resolved overnight. The US debt position for me, for example, is a much larger worry [than] the deficit that they’re currently spending at, [at] the moment.
If we just look at the implications of that, the US tax receipts every year are about $5 trillion. On interest payments last year the US spent $400 billion. This year it’s $1 trillion.
Next year it’s going to be closer to $2 trillion. So about 40% of next year’s budget is going to be on interest alone.
On the conflict we could very well see the US stop supporting Ukraine, and if there’s no support from the US there will be some sort of treaty armstice in the Ukraine. And we are starting to see that the Middle East is slowly starting to sort itself out as Saudi Arabia and others are looking to China to almost peace-broke that.
Those things can change overnight. That’s politics for you, but economics is a little more fundamental.
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NOMPU SIZIBA: When did you start getting concerned about US debt? Is that like $33 trillion at the moment? Was it $15 trillion? Was it a $16 trillion? [Laughing]
PHILIP SHORT: I’m losing numbers and I’m losing count. But the problem is when it’s not. The absolute number on the debt burden is one thing. It’s when the interest rates started increasing. That’s when you started having 0% on R50 trillion; you’re not paying any interest. [But] 5% interest on $30 trillion – that’s a different story.
So it’s the interest rates that have gone up which are now causing a problem.
NOMPU SIZIBA: I hear you. Philip, thanks very much for speaking to us this morning. That was Philip Short, who’s a co-fund manager at Flagship Asset Management.
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