Five years ago, economists and investors were fretting about ‘triple shocks’ hitting the world economy. Lest you have forgotten, these were the US Federal Reserve preparing to raise interest rates after a long period at 1.00%; a sharp slowdown in China; and rising oil prices.

Now, I see a possibility that triple shocks will once again emerge as a theme in the second half of 2009 or early 2010. Naturally, this could tie in with Business Monitor International (BMI)’s scenario of a double-dip US recession, or at best our core view of a protracted recession.

Buy how might ‘triple shocks’ attack us again? Consider the following:

US Interest Rates
The June 2010 eurodollar futures contract – a measure of expectations of US interest rates – dropped sharply last Friday, pricing in sharply higher Fed Funds rates – of almost 2.25% at one stage on Monday – by that date. One reason was that the May non-farm payroll figures in the US were not as bad as expected – 345,000 job losses last month compared to 520,000 forecast. That said, losses are still losses and US unemployment edged up to 9.4%, its highest rate since July 1983. The second reason is that US Treasury yields have risen sharply, with the 10-year note hitting a seven-month high of 3.93%. As to why, higher inflationary expectations are the most probable cause. But whatever the reason, higher yields increase mortgage repayments in the US and prompt American consumers to save more or simply spend less. Neither outcome is good for countries that export manufactured goods – i.e. most Asian economies.

June 2010 Eurodollar Futures

China
Regarding China, my colleagues and I have long been pessimistic about its predicament. Although we are aware that several investment banks have recently raised their 2009 growth forecasts from the 5.0-6.0% range (which is what BMI forecasts) to the 7.0-8.0% range, I feel that it is too soon to proclaim a decisive recovery. Indeed, BMI has since April been warning about the possibility of a double-dip slowdown (not officially a recession, since China is still growing) in China. This is possible even if the US does not follow this path, but becomes more likely if the US does. Either way, given China’s centrality to the global economic matrix, renewed weakness in China would constitute a ‘shock’.

Oil
And finally, on the subject of oil prices, Brent crude has recovered to almost US$70.00/bbl and could conceivably head towards US$90.00/bbl. Seventy dollars is twice what it was in mid-2004, when its push above US$35.00/bbl constituted a shock. But are prices above 70 justified in light of the world’s current economic woes? I think not. What is more, higher oil prices could boost inflation worldwide, thereby denying central banks further rate cuts, or forcing them to raise rates sooner than they would prefer. Expensive oil is especially problematic for Asian economies, since most of them import 80-100% of their oil requirements. This would drive up inflation, strain fiscal coffers (since fuel prices are subsidised) and also erode their trade surpluses. Higher oil prices would also coincide with a weaker dollar and thus stronger Asian currencies, which are bad for exporters.

Brent Crude Oil, US$/bbl

Given Asia’s ongoing dependence on exports to the US and China and its sensitivity to oil prices, the region could suffer a big blow from triple shocks.