For some time, market observers have been crying caution of an upcoming global recession, primarily due to a much prolonged period of economic expansion post 2009. While this extension in economic growth period was primarily driven better inventory management and stronger corporate cash position, of late, signs have been getting stronger of growing weakness in different parts of the globe.
These may not be solid indicators of a global recession, but it’s safe to remain cautious in such a market scenario, given how inefficient we are at predicting them.
In the US…
Though the US has mostly remained resilient to a global slowdown, a couple of factors are currently weighing on the economy. The most important one among them is the trade war with China. Add to that a shortage of offshore dollars, which is driving foreign currencies lower, including the Chinese Yuan. Yuan recently fell to a three-year low.
The forex headwinds and trade war crisis have dented the US manufacturing sector over the past year. According to the industrial production report, US manufacturing recently witnessed a decline for the first time in 10 years.
The trade tiff has also hurt the yield curve of US bonds, which earlier this month, swung to the negative territory. In order to provide a fillip to the economy, the Federal Reserve is now expected to cut interest rates. Last year, corporate tax reductions initiated by President Donald Trump and low unemployment rates had encouraged the central bank to raise the rates.
Separately, job growth in the US also seems to have stagnated. According to the most recent nonfarm payrolls report, total job growth was just 96,000 excluding government payrolls, compared with the expectation of 150,000. Including government payrolls, job growth was 130,000, still missing the consensus.
Outside the US, things have been worse.
Outside the US…
Two of Asia’s largest economies – China and India – have been witnessing slowdown lately. The trade war has hampered supply chain in China as well. China’s growth in industrial production is currently at less than 5%, a decline not seen in over three decades. Though Beijing is taking measures to pump up its already dull economy, we are yet to see any visible recovery.
And it’s all a chain reaction. The sluggishness in China is affecting Germany. China is the European country’s major importer of automobile and machinery. Germany’s GDP declined slightly in Q2 and is projected to see further declines in the upcoming quarters.
Separately, there is the looming threat of the UK leaving the European Union without inking a proper deal, which could have economic repercussions throughout Europe and elsewhere.
Other key international markets such as Venezuela, Argentina and Iran are already reeling under socio-political or macro-economic crises. OPEC may also be on the brink of a crisis, with market experts predicting oil price drop to up to $30.
As per data from IHS Markit, over 60% of the countries around the world are currently witnessing a contraction in manufacturing. This does not give an optimistic picture heading into 2020. These are also not necessarily pointing to a 2008-like economic depression, but it’s safe to remain cautious when the world throws out so many red flags.