Economies: get ready for a bumpy ride

The USA was buoyant a few weeks ago. The number of unemployed was stabilising, if not actually falling.

But underneath the figures was a harsh truth: hundreds of thousands of the jobs taken up were seasonal jobs: like Disney World, it was all fantasy. Obama's great idea was to take on the unemployed to work on the census. That would lead to good news and good news leads to confidence and confidence leads to people buying stuff.

But in the USA, in particular, it also leads to increased consumer debt.

And the jobs figures are good news headlines disguising bad news reality. As of June this year, the percentage of the USA population of working age that actually have jobs is - wait for this - 58.5%.

Read that again: more than 40% of employable Americans can't get a job. And that is after taking about a million baby boomers out of the equation as they have popped out of the top of the qualifying age range, plus other reasons for no longer seeking work. Like death or permanent disability.

Even having a job is no guarantee that your salary will get paid: remember the fuss about the Attorney General who refused to go along with Schwarzenegger's plan that all state employees must take unpaid leave each month? For some workers, that has translated to a pay cut of almost 15%. That has directly translated into more than 20,000 home repossessions in the first three months of this year, defaults on car and other loans and a rising credit card default. And if that's not bad enough, some 200,000 California state employees will see their pay cut to the minimum wage of just USD7.25 per hour. Can he do that? Yes, he can ruled a Californian Appeals Court because no state budget is in place. The technical reason is that, without a budget, the Controller has no authority to pay wages or salary except as required by Federal law - and the only obligation there is to meet the Federal minimum wage. Even California's state minimum of USD8 per hour cannot be met.

And for those that have lost their jobs, the safety net of US government support is about to be pulled away: some 1.2 million people are coming to the end of their statutory entitlement to unemployment benefits. These are not, remember, the long term unemployed: they are Americans who had jobs, careers and at least the prospect of prospects. They don't want to be dependent on the state. They want to work. There just aren't any jobs to be had.

California is the USA's largest economy after New York. Indeed, if California was a country, its economy would be bigger than that of Greece.

And over in Europe, Greece continues to underpin fears that the recession is not over. While all eyes were on whether deals would be done to save the Greek economy, some harsh realities were creeping in elsewhere. Almost un-noticed until the last minute was the fact that ECB support for the banking sector was about to expire. That led to a rapid decision to re-date the expiry - and to give both banks and governments a 120 breathing space. In the UK, good news stories about banks merely act to reduce the rate of decline in share prices which have fallen, broadly, 10% in the past few weeks despite there being no significant risk to any UK bank: it's the whole of the rest of the sector that's in a worrying condition. And across the Atlantic, US bank stocks are doing little better. Yesterday, only Citi went up. It's price is so awful that a one cent change reports as a quarter of one percent increase and its market cap is now only around two thirds of that of HSBC and the latter's share price is more than a dozen times that of what used to be the USA's - some claimed the world's largest bank.

But it's down on the high street that the real signs have been showing for more than six months, denied by those who don't want to see scary things. It often seems as if the world's most prominent economists are hiding behind the sofa so they can't see the scary things happening on the other side.

It doesn't take a rocket scientist to work out that if retail shops are closing due to poor sales then all the money pumped into the economy to increase consumer spending (itself an utterly dubious response, unthinkable to anyone except a Treasury minister) is not reaching the intended target. And we know that to be true: where did the TARP money go in the USA? It went to fund a series of large scale and expensive takeovers. In the middle of the worst recession in several generations, Kraft raised the money to buy Cadbury in a near-hostile bid for a company that was not in any sense in the middle of a fire sale. Other massive deals were done, too, all with or backed by money that governments had intended would stimulate the wider economy.

The helicopter strategy of pumping fictitious money into the economy has not worked: for sure, unemployment has been artificially reduced in some countries but in the UK the last (we hope) Labour government produced two sets of data to bolster their stories while not actually telling the full truth. They said first that illegal immigration had fallen significantly and that unemployment was not rising so rapidly. But behind those factors were this: a significant proportion of illegal immigration was by citizens of eastern European countries. Those countries joined the EU and, under the EU's freedom of movement of labour rules, they were entitled to legally go to Britain to seek work. Secondly, many of those who had sought work in the UK as a refuge from poverty at home found that jobs dried up. Although some stayed to claim benefit, many many more went home. So as jobs were lost, the number of unemployed did not rise at the corresponding rate. Many of them were self-employed tradesmen or sub-contractors. As contracts dried up, they left.

The housing markets in several countries are in a mess. Australia's continues to defy logic and prices are increasing in some districts. But in the UK and the USA, it's a different picture. The short-term "homebuyer's tax credit" - an Obama idea - expired at the end of April. In May, the number of contracts signed fell by more than 30%. For sure, April saw a pre-expiry rise but even so, the May figures were dismal. And June's not much better.

But despite all the bad news on the consumer front, that's not where I see the biggest risk. Everyone is looking towards housing, car loans and credit cards. No one is focussing on the businesses that are affected when people struggle to pay off those loans - even when they eventually fail.

I see the prospect of widespread business failures in retailing and the industries that support them. I see substantial vacancies in retail, warehousing and office space. And even though bankers generally have an unhealthily supportive relationship with landlords, there is only so long that even banks will treat them leniently.

Rents will be forced down if properties are not to be left empty. Empty units in a shopping mall are the kiss of death to the whole mall. And so is filling them up with short term charity or "everything's a dollar" shops. As newer malls see the rent-free set up periods granted to high profile tenants, those brands will simply move out if they don't get a better deal. And if they do, then others in the Mall would press for it.

There is a real chance that some shopping malls will fall into the hands of receivers in the next few months.

And portfolios of retail premises are likely to be under pressure even sooner.

As the next wave of consumer non-spending bites, bookshops, record shops, even home electricals will find that their sales decline because their sales are out of discretionary spending. Soon clothing will, as it did last year, drop off. The queues outside self-opinionated "designer" shops in Hong Kong's Canton Road will probably continue - but they are already significantly shorter than even a year ago. In the rest of the world, forget it. Expect to see queues in outlet centres rather than in the traditional famous shopping streets.

Are we heading for deflation? Some say so. Is that a bad thing? It depends on where you are.

As the UK's previous government systematically wrecked the economy, the pound is - on a good day - so weak it can't stand. Malaysians heading for the UK say how cheap it is: after a period where it cost almost MYR8 to buy a pound, now it costs about 4.9. Incredibly, it's cheaper to buy technology in the UK than in Malaysia - and that's before visitors recover most of the 17.5 (soon to be 20%) value added tax applicable to UK sales.

There is, simply, no way that what is happening on the ground points to a recovery. The same politicians, central bankers and economists that told us that the previous crisis was not happening are saying more or less the same again.

They were wrong then. They are wrong now.