The global financial markets are a highly sophisticated space today, with some of the best minds and technological tools available to predict future market movements. There are a number of economic indicators that can help us understand market trends. Unfortunately, many of these point towards an impending global recession, post-2019.
For starters, five of the world’s largest economies are showing increased risk of recession. While the UK economy has shrunk for the first time since 2012, data suggests that Germany, which is the fourth largest economy in the world, showed signs of contraction in the months leading to June 2019. Both the United States and China are engaged in a seemingly never-ending trade war, while Hong Kong and Singapore, both strategic finance and trade hubs, are suffering as well.
While these might all seem like signs of a potential global recession in the future, there are some specific signals we must look at in order to confirm such future prospects.
The yield curve represents the interest rates paid by various US treasury bonds. Usually, short-term bonds, such as 1-month or 3-month notes, are expected to pay lower interest than long-term ones, such as the 10-year or 30-year notes. This makes the curve arch in an upward slope.
The yield curve starts flattening when this difference between short-term and long-term rates starts decreasing. Technically, at this stage, a 10-year note will still offer a higher yield than a 3-year note. On extremely rare conditions, the curve will invert. This means that short-date yields are higher than their long-term counterparts.
In March 2019, this rare phenomenon occurred for the first time in 12 years. The last time such an inversion occurred was just before the 2008 crisis. The scary part is that this inversion of the yield curve has happened before each recession in the past 50 years, and it has been a false signal only once during that period.
Although the curve inverted again in May 2019, the gap between the 10-year and 3-month notes has been shrinking for some time, which is a warning sign.
The UK is currently the world’s sixth largest economy. But, if Britain leaves the EU without a deal on October 31, 2019, economists predict serious global repercussions. The IMF, OECD and the World Bank have already predicted that a no-deal Brexit would impact global growth. According to the IMF’s latest report, released in July 2019, global growth will slump to 3.2% in 2019, the weakest in 10 years.
The UK economy has already contracted by 0.2% between April and June 2019, to the lowest level since 2012. Further political uncertainties in the country will also add to the crisis. All this will affect business performance, dislocate supply chains and weaken investor sentiment.
It has been over 18 months since President Trump decided to impose 25% import tariffs on goods from China, as well as those from Mexico, Canada and the EU. As of September 2, 2019, China has lodged a WTO tariff complaint against the USA, the third lawsuit so far, challenging US tariffs on a further $300 billion worth of Chinese goods.
This ongoing trade war has not only slowed economic growth in both the countries, but also created a global manufacturing slump. Also, China’s deliberate weakening of its domestic currency, the Yuan, continues to create significant market volatility. The IMF estimates that continued escalation of the trade war could potentially wipe $455 billion off the global GDP in 2020.
The slowdown in the Chinese economy has weakened its demand for foreign goods, particularly luxury cars, which are exported by Germany. According to data from the Federal Statistics Office, declining exports have impacted Germany’s GDP growth, which fell 0.1% in Q2 2019, taking the annual growth rate down 0.4%.
Germany is a European economic powerhouse and its declining economic growth is only likely to impact investor sentiment. Its shrinking growth has created an overall slowdown in the Eurozone economy. The European Central Bank (ECB) is expected to slash interest rates in the coming months, in order to boost regional growth.
Although the stock markets in the US and EU remain stable, the bond markets seem jittery. In late August 2019, UK Prime Minister, Boris Johnson, set October 14, 2019, as the formal date for the state opening a new session in Parliament. Investors realised that this would result in a very narrow margin of time until the planned date for Brexit. As a result, the Pound Sterling declined and equities worldwide registered losses.
On the other hand, the Dow Jones Industrial Average rose 0.69% and the S&P 500 gained 0.52%, with experts suggesting that the markets are increasingly becoming favourable only for risk-takers. With increasing uncertainty regarding what happens next and as Central Banks around the world continue to slash interest rates, investor confidence is dropping.
Analysts put emphasis on the fact that the bond markets never lie, particularly when it concerns the US economy. Inflation levels remain historically low in the US and other countries. This is dangerous and makes it hard to tackle recession, much like how deflation has been hounding Japan’s growth for so many years now.
Whether these are futile signs or indeed worrisome, will only be proved with time. What needs to be considered is that global economic growth has continued for 10 years. Companies have seen huge growth in demand, and consequently revenues too. At the same time, expenses have been allowed to run amok, which is not sustainable.
During this period of global and political instability, traders need to be aware of the global economy, including retail sales and real estate figures, which offer strong insights into consumer spending trends. Also, understanding your risk tolerance levels and giving yourself sufficient time to tackle market volatility tends to help make informed trading decisions. The good thing is that the banking system is still going strong and companies are still making money. Even if we do face a recession, it might not be the same as 2008.