Recession: Speculation or Certainty?

Some experts predict a recession fed by ongoing political and economic upheavals between powerful nations. Are falling long term interest rates, the appearance of the dreaded inverted yield curve and diminishing growth precursors of a Global Recession?

Background

Market watchers are closely monitoring various indicators which have historically preceded market crash/ recession in the past, in order to give a prognosis for the current existing market turmoil in all major economies.

Some experts predict a recession fed by ongoing political and economic upheavals between powerful nations. Doomsday prophets have already announced an impending recession and have declared that unless all countries abandon their narrow "me and my country" perspective and seek a collaborative action plan, the future would become a hard and painful reality.

Analysis

Countries are considered to be in a recession when there is a significant decline in economic activity across the economy, and gross domestic product (GDP) falls for two consecutive quarters. The rise of 1.5 to 2 percentage in unemployment within 12 months and a decline in stock markets are other indicators. An economy can experience a recession sometime before it is officially recognized as a slump. 

Historically, if we analyze the 1929 crash and the Great Depression that followed, we see some similarities to the current situation. The preceding years to 1929 saw an unrealistic spike in stock markets. The economy appeared healthy with increasing wages and unemployment below 4%. There was an overproduction of goods and crops with warehouses full of unsold consumer goods. The  ‘Get Rich Quick’attitude fuelled speculation, with investors buying stocks on high interests loans from brokers who could call loans at short notice. There was distress in the agriculture sector too. Other important economic barometers were also slowing or even falling by mid-1929, including car sales, house sales, and steel production.

In the current scenario, while there has been no speculative boom in stock markets, there are other worrying signs. 

As per Ron Insana of CNBC, global interest rates are negative because the world economy is heading toward a synchronized recession. Transportation, banking and small-cap stocks, are all flashing warning signs of an impending domestic economic slowdown. Since 1955, or 1967, an American recession has been preceded by an inversion of the yield curve (where interest rates on long-term bonds are lower than short-term rates) 100% of the time. Nine major economies are near, or already in, a contraction, including Germany- Europe's economic engine. China, of course, is slowing appreciably. President Donald Trump's trade war has ground global manufacturing to a halt while stunting export and import activity from Beijing to Baltimore. Other risks are the increasing likelihood that the U.K. crashes out of the European Union with a "no-deal Brexit." Britain's Prime Minister, Boris Johnson, has reportedly asked Queen Elizabeth to suspend Parliament so that he can ram through the exit with no legislative opposition. That would likely wreak further havoc on the British and E.U. economies.

Germany, the world's fifth-largest economy, reported that its economy shrank 0.1 per cent in the second quarter. The United Kingdom's economy also contracted in three months to June. Italy is also under pressure due to budget standoff with the E.U. Spain, with an unemployment rate of 13.6% and half of a million (31.7%) of its youth looking for jobs, has had no stable government for three months.

In the U.S., recession fears grew for the first time in 12 years after yields on 10-year treasury bonds dropped to less than two-year rates. However, the positive is that markets are buoyed by consumer spending - a sign that consumer confidence remains positive, despite falling business confidence.  

Regional engines of economic growth appear to have run out of steam. Iran, facing comprehensive sanctions, is denied access to the financial markets easily. Argentina is weighed down by enormous debts and Venezuela despite holding vast oil reserves, is in a political and economic mess. Singapore's economy has contracted by 3.3 per cent, which the country has blamed on the trade war. Mounting political and geopolitical risks building up in the Persian Gulf and the Korean peninsula are not helping matters either. The International Monetary Fund has downgraded its expectation of global growth for 2020 to 3.5%. Christine Lagarde, Director of IMF, stated that "After two years of solid expansion, the world economy is growing more slowly than expected and risks are rising," "Does that mean a global recession is around the corner? No. But the risk of a sharper decline in global growth has certainly increased," she said, urging policymakers to be ready for a "serious slowdown" by boosting their economies' resilience to risks.

Assessment

  • When companies experience an economic slowdown, they begin to save by reducing employment levels. Panic and expectation of slowdown can create a downward cycle, which can trigger a full-blown recession. 
  • Unlike during the Great Recession, leaders of different nations are not working in unison to arrest the slowdown. Governments need to coordinate their monetary and fiscal policies to stimulate demand in the short-term and try to set aside their domestic compulsions (like the impending Presidential Elections in U.S.) for the sake of global fiscal tranquillity. 
  • Upheavals in the US, the driver of the world economy, have a global impact in a world connected by commerce. A combination of high borrowing costs and the tariff war with China, which has increased import costs, has hit U.S. industrial production. Figures show the U.S. manufacturing sector in decline for the first time in a decade.
  • The U.S. – China trade war is fuelling deglobalization because countries and firms can no longer count on the long-term stability of these integrated value chains. Also, there is no expectation of a trade deal before the 2020 election. 
  • The contrary view is that while there is a slowdown, the situation is non-alarming. As per the New York Times, the U.S. certainly isn't in a recession right now. It may well avoid one for the foreseeable future. But the chances that the nation will fall into recession have increased sharply in the recent months. The economy is growing at a roughly 2 per cent rate and keeps adding jobs at a healthy clip. There is no sign of the obvious bubbles that triggered the last two recessions, the equivalent of dot-com stocks in 2000 or housing in 2007.
  • The overall economic situation is grave but not beyond redemption. We have not reached the tipping point, and with strict fiscal control, collaborative cooperation between major players, a recession can be averted.

India Watch

India is witnessing a slowdown. India's economy has declined for three straight quarters, and the growth forecast is also not uplifting. Some sectors, like the automobile industry, are dangerously close to recession. Both industrial production and core infrastructure sectors have witnessed a decline.

The government has revised downwards the growth rate of eight core sectors for May to 4.3 per cent from the previous estimate of 5.1 per cent. The eight-core sector industries - coal, crude oil, natural gas, refinery products, fertilizer, steel, cement and electricity -had expanded by 7.8% in June last year. Till June this year, growth dropped to a negligible 0.2%. 

Hopefully, the string of measures, including the release of RBI surpluses announced by the Govt, will take root quickly and bring about a turnaround.

Image Courtesy: debtfree digi 

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