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  Select Month November 2008 October 2008 August 2008 May 2008 April 2008 December 2007 October 2007 February 2007 September 2006 November 2005 October 2005 September 2005 August 2005 March 2005 January 2005 December 2004 March 2004 November 2003 October 2003 June 2002 May 2002 February 2002 December 2001 May 2001

The unfolding events in the credit markets are only the beginning of considerably leaner times ahead. What started with the Bear Stearns Hedge Funds in February of this year, is destined to infect the entire economy.

Whilst the exact catlayst for the overdue economic downturn was always in debate, rising inflation, HIPs and Gordon Brown becomning PM being some of the possibles, the economy’s cards had been marked for some time.

In “Sell Now! Why You Don’t Want to be a Homeowner”, published about a year ago, we included a long range chart showing RPI-adjusted GDP going back to the 70s. It was christened the GDP “Wedge of Doom” as it both showed a large wedge formation, which had lasted over 30 years, and a noticeable decline in aggregate GDP growth which promised tough economic times ahead.

Updating the chart with the most recent GDP figures, released last week by the ONS, provides an even clearer picture of the declines ahead.

The wedge can easily be seen, as can how the GDP growth rate broke below the trend line at the end of 2004 and kept declining through Q3 of 2005.

You can also see how in Q1 and Q3 of 2006 GDP growth came up against the underside of the old support (lower green) line and bounced off it. In the investment world it is common knowledge that “old support becomes new resistance and old resistance becomes new support”. In this case, the old support has become new resistance. That is bad as it signals a stifling of GDP growth for many years to come.

If we reduce the time frame to 1993-onwards, we can get further confirmation of a recession with another chart.

As you can see above, for 12 years the GDP growth rate moved within a range of about 1.4% to 4.3%. Then in Q3 2005 it broke through the floor, when RPI-adjusted annual GDP growth fell to just below 0.9%.

When it bounced back it peaked at 2.94% in Q3 2006, which provided the upper green (resistance) line for the trend. GDP growth declined again, then bounced back to a lower high of 2.57% in Q2 2007 before falling away again in the third quarter. This confirms the downtrend within the new channel.

The red arrow is an indication of where the RPI-adjusted GDP growth rate is heading.

What we have are two different charts, each with their own patterns. In both cases both patterns have been broken to the downside. In both cases there has been confirmation that the old patterns are out and the new ones, which promise tough times for the economy, are now in control.

So, how are things going to play out?

A recession based on RPI-adjusted GDP starting in 2008 is a given. Starting Q3 or Q4 is my view. Though RPI-adjusted GDP could turn negative as early as Q2 2008.

How long it lasts is another question. Given how dependent the economy is on rising house prices and consumer spending, as opposed to actually making stuff and exporting it, I can see GDP growth being negative to Q1 2010.

More charts and further analysis can be found at http://inspecie.co.uk/

And finally.

Over the next couple of weeks I will be preparing a research report with more details on the recession expected to start in 2008 and the others expected between now and 2020. If you want a copy, please use the comment box below. Provide your details as normal and enter “Recession Report” in the comment box itself. It will be filtered out and you will be contacted when the report is published.

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