• A global recession is less likely than a ‘pause that refreshes’ or the Japan scenario.

Most recessions are triggered by either asset bubbles bursting or by a surge of wage inflation. We are seeing neither at the moment in the industrialised economies. In the absence of an economic or political  shock to the global economy, it is more likely that we are entering ‘a pause that refreshes’, aggravated perhaps by the U.S/ China trade dispute. This could easily reverse if a U.S/China trade deal is announced, and/or Germany declares a fiscal expansion policy to avert recession.

The Japan scenario appears less likely, given that the ‘zombie’ banking system that triggered Japan’s prolonged period of low/no growth since the mid-1990s is not replicated in the U.S, China or much of Europe. Although critics of the ECB’s negative interest rate policy (ie Germany), do point out that the policy inhibits bank credit growth and hits income from savings – both of which are deflationary.

• Brexit.

Undeterred by a Supreme Court ruling that he lied to the Queen over the reasons for prolonging Parliament, and having lost all seven votes in the House of Commons since becoming Prime Minister, Boris Johnson is in a surprisingly chirpy mood as he opens the Conservative Party’s annual conference. He will be in pre-election campaigning mood, ahead of a general election that appears almost certain to happen over the coming months. He is likely to present himself as the champion of the ‘people against Parliament’, in a play-book similar to Trump’s ‘drain the swamp’ election campaign.

Johnson appears willing to defy Parliament again, and to ignore the so-called Ben Act. Which would be illegal. The act expressly prevents a no deal Brexit at the end of October, if no agreement with Brussels is reached by 19^th October. The act’s proponents (ie, Parliament) fear that Johnson is too keen for a no deal, preferring to face any ensuing chaos arising from it than facing a general election as the man who failed to take the country out of the E.U on 31^st October.

He knows the chances of a deal before 19^th October are slim, given his insistence on ending the Irish backstop, and unwillingness to accept prior commitments made by Theresa May on product standards alignment, tax and state aid. The E.U says that the U.K has failed to deliver any new meaningful proposals that might end the need for an Irish backstop, despite constant claims from Johnson that ‘good progress’ is being made in Brussels. A final flourish of government proposals is anticipated at the end of this week.

• Gilts

The gilt market may become jittery this week if the Conservative Party use their conference to announce pre-election increases in public spending and/ or tax cuts. The lack of enthusiasm to continue with austerity shown by the government in the recent autumn budget statement has had little impact on the bond market. But last week a shortfall in corporate tax, and a rise in student loan defaults, led to an upward revision for public borrowing by the OBR in the next fiscal year (2020-21) to a range of £60bn to £70bn, from a previous target of £44bn. As a percentage of GDP, this is from 2% to around 3%. This destroys the Treasuries’ Brexit war chest (emergency funds in the event of a no deal), and is before any new spending commitments are made by the government. Johnson is reported in the F.T to have urged the Treasury to ‘go long’ on breaking fiscal targets, if they are to be broken at all.

Furthermore, the Labour Party -which is the most left wing of any major socialist party in Europe at present- will see any discretionary increase in the deficit by the Conservatives as an acceptable starting point for their own policies. The higher the Conservatives set it, the higher Labour will aim if they get to 10 Downing Street.

• Sterling

Sterling has risen a little since the Supreme Court asserted that the executive rules through Parliament, not by bypassing it. But economists, and the FX market, are increasingly concerned that a prolonged period of dithering by the U.K may be given a further extension if Article 50 is extended once more. With damaging consequences for investment and future growth prospects. What, exactly, would be the point? Would a general election deliver a government able to push through the House of Commons a deal that may not differ much from the one Theresa May was offered? Unless a second referendum is offered, with the explicit binary position of Leave with no deal, or Remain, the log jam could persist under a new government.