Is the economy about to get worse?

A “global economic collapse” could be on its way, financial services firm Société Générale warned its clients. Columnist Ambrose Evans-Pritchard wrote in the Telegraph earlier this week:

In a report entitled “Worst-Case Debt Scenario,” the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.Overall debt is still far too high in almost all rich economies as a share of gdp (350 percent in the U.S.), whether public or private. …”As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.Under the French bank’s “Bear Case” scenario (the gloomiest of three possible outcomes), the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105 percent of gdp in the UK, 125 percent in the U.S. and the eurozone, and 270 percent in Japan. Worldwide state debt would reach $45 trillion, up 2½ times in a decade.(UK figures look low because debt started from a low base. Mr. Ferman said the UK would converge with Europe at 130 percent of gdp by 2015 under the bear case.)The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Aging populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt,” it said.

Also this week, Nouriel Roubini wrote an article titled “The worst is yet to come: Unemployed Americans should hunker down for more job losses.” Labeled “Dr. Doom” by the New York Times for his frequent predictions of economic catastrophe, Roubini’s predictions have often proven accurate. “The gloomy sage of the credit crunch has been right almost every step of the way,” wrote Prospect Magazine, labeling him the second-greatest public intellectual of 2008. In his article, he wrote:

Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening. While the official unemployment rate is already 10.2 percent and another 200,000 jobs were lost in October, when you include discouraged workers and partially employed workers the figure is a whopping 17.5 percent.While losing 200,000 jobs per month is better than the 700,000 jobs lost in January, current job losses still average more than the per-month rate of 150,000 during the last recession.Also, remember: The last recession ended in November 2001, but job losses continued for more than a year and a half until June of 2003; ditto for the 1990-91 recession.So we can expect that job losses will continue until the end of 2010 at the earliest. In other words, if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down. All the economic numbers suggest this will take a while. The jobs just are not coming back. …The long-term picture for workers and families is even worse than current job-loss numbers alone would suggest. Now as a way of sharing the pain, many firms are telling their workers to cut hours, take furloughs and accept lower wages. Specifically, that fall in hours worked is equivalent to another 3 million full-time jobs lost on top of the 7.5 million jobs formally lost.This is very bad news, but we must face facts. Many of the lost jobs are gone forever, including construction jobs, finance jobs and manufacturing jobs. Recent studies suggest that a quarter of U.S. jobs are fully out-sourceable over time to other countries.Other measures tell the same ugly story: The average length of unemployment is at an all-time high; the ratio of job applicants to vacancies is 6 to 1; initial claims are down but continued claims are very high and now millions of unemployed are resorting to the exceptional extended unemployment benefits programs and are staying in them longer.Based on my best judgment, it is most likely that the unemployment rate will peak close to 11 percent and will remain at a very high level for two years or more.The weakness in labor markets and the sharp fall in labor income ensure a weak recovery of private consumption and an anemic recovery of the economy, and increases the risk of a double-dip recession.

Watch the global economy. The worst is yet to come.