Is the global economy on the brink of recession?
Are we really set to see a global recession?
There is a view, percolating among the more bearish commentators, that the global economy could be on the verge of a recession. If this is right, stock markets should fall in anticipation. But is this right?
Global GDP slowed from a year on year rate of 3.7 per cent in the first half of last year to 3.3 per cent in the second half. The euro area and Japan were the weak spots.
The factors that may push the global economy into recession include:
- The Italian crisis leading to some form of banking crisis beyond Italy’s borders.
- A slow down in the global auto market, partly caused by vehicle emission tests.
- A slow down in China.
- Fears that the US economy is set to weaken sharply.
- That the economic cycle has run its course.
- Fears over a global trade war.
- Brexit related.
- And now tensions between India and Pakistan.
The cycle and the US
The US economy is now close to enjoying its longest run of economic growth ever. Some argue that this means a recession is inevitable. Well, recessions are always inevitable, they are facts of economic life, but that does not mean one is about to occur. If you toss a coin in the air four times and you get heads, what are the odds of you getting heads when you toss it again? Answer: 50/50. Just because the US economy has been growing for around a decade, it does not mean it is about to skid to a halt.
Last year, my big fear was that the Trump tax cuts when the economy was close to full capacity would lead to higher inflation forcing higher interest rates, creating havoc on a highly indebted world. Instead, the tax cuts seemed to have created a temporary boost on the US economy, inflation looks controlled, the Fed is no longer in a rush to increase rates, indeed the next interest rate change may be down.
The latest data shows that the US economy slowed at the end of last year, so for the year as a whole growth was less than the three per cent President Trump had promised. Capital Economics predicts that growth will slow to 2.2 per cent this year and 1.2 per cent in 2020. That is not good, but hardly a sign of recession.
In the UK, the good news is that wages are at last growing much faster than inflation. In the three months to December, wages including bonuses, rose by 3.4 per cent, inflation was just 2.3 per cent. With the labour market so tight, wages are likely to see even bigger rises. Whether Brexit starts leading to mass job losses is another matter. I have given up calling Brexit. I would say the odds of hard Brexit, some kind of Theresa May deal and reversing Brexit altogether are about 33.3/33.3/33.3 per cent.
Hard Brexit may indeed be followed by recession — more likely it will be avoided, for now.
The slowdown in the auto industry is hurting. But it is too soon to be talking about peak car. I do believe that the auto industry has a major threat ahead as the Uber economy converges with autonomous cars. But that danger might be as far as ten years away. For the time being, I see the problems with the auto industry as being largely temporary.
The latest purchasing managers index tracking the euro area rose to a three-month high. Manufacturing was at a 69-month low, but services expanded at a reasonable pace. The German economy may flirt with recession this year, but that won’t be enough to drag the global economy down.
China is a bigger worry. But for the time being, policy makers seem to have put economic long-term stability aside, in favour of supporting the economy. Not so long ago, deleveraging was on the lips of Chinese policy makers. Now it barely gets mentioned. If China was to administer sharp deleveraging medicine, it would probably be good for the long term but may have servere short-term consequences. The risk of these severe short-term consequences has diminished.
Meanwhile, in some areas of Japan, house prices are approaching the levels seen during the bubble, from way back when, in 1989. But the latest purchasing managers indexes suggest the economy may contract in Q1 of this year.
Whether we see a full blown trade war is the most difficult thing to predict of the lot. Will a bull set loose in a china shop do much damage? It depends whether it has been sedated. I read that Google searches of Bloomberg news stories reveals that use of the term ‘trade war’ has halved since the middle of 2008 — or so says Capital Economics.
Does this point to global recession?
To me, this feels more like a mid-cycle slow down than the end of the cycle. If we can avoid self-inflicted wounds, such as trade wars, or indeed wars, and hard Brexit is avoided, I suspect 2019 will see the global economy slow, but not suffer recession — ditto for 2020.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees