Historically, an economic recession occurs every 10 years. It’s now 2019. It has been 10 years since the 2008/2009 Financial Crisis which created a global economic recession. Are we going down the same path again?
No. A recession is unlikely to happen in 2019, but a slowdown is possible.
Economists largely agree that the global economy is losing momentum. They expect further moderation this year due to tighter monetary policy, trade protectionism and political uncertainty.
What they are concerned about is the significant downside risks which will dampen the global trade, investment, jobs and eventually economic growth.
Since last year, major international think tanks have cut their 2019 global economic growth forecasts down to an average of 3.6%; and they expect almost 4% growth for 2018.
IMF & OECD Cut Global Growth Forecasts
For instance, the International Monetary Fund lowered its forecast for global economic growth for 2018 and 2019, from 3.9% to 3.7%.
According to the fund’s latest World Economic Outlook report released in October last year, it also cited trade tensions and rising interest rates will pose risks to the global economy.
Meanwhile, the Paris-based OECD also scaled back forecasts and warn that the global economic growth has peaked.
“Global growth is projected to settle at 3.7% in 2018 and 2019, marginally below pre-crisis norms, with downside risks intensifying.”
The OECD said it was cutting its 2018 forecast by 0.1 percentage points and its 2019 forecast by 0.3 points.
Currently, all eyes are on the US as the world’s largest economy in the world will affect the global growth.
US Economy Is Slowing Down
Where is the economy heading in 2019?
The US performed strongly in 2018, with robust growth and the unemployment rate has hovered around multi-decade lows. But the question is, can this positive momentum sustain?
Last year economic activity has been boosted by US President Donald Trump’s tax cuts, but the impact of loose monetary policy is now starting to recede. The Federal Reserve (Fed), America’s central bank, has been gradually increasing interest rates – in part because it fears the tax cut.
Fed officials last raised rates by a quarter-percentage point to a range between 2.25% and 2.5% when they met 19th December. The move marked the fourth increase last year and the ninth since it began normalising rates in December 2015.
However, some people may not be happy with the decisive move by the Fed as the economy is slowing down and the macro picture is still unclear. Trump is the one who always criticises the Fed is raising interest rate too fast.
As such, the global market will focus on the Fed’s rate path in 2019.
Nonetheless, the Fed will scale back its plans to raise interest rates this year as uncertainty is increasing since last year. All these measures have confirmed the global fears that the US economy is indeed slowing down.
Tighter Monetary Policy
Tightening monetary policy of advanced countries is one of the key downside risks to the world economic growth, including trade tensions, and political uncertainties.
According to IMF latest world economic outlook report, “with advanced economy interest rates expected to increase from accommodative levels and with trade tensions rising, emerging market and developing economies need to be prepared for an environment of higher volatility.”
Not only has the Fed increased interest rates last year, but they have also begun the process of reversing its bond-buying programme.
The quantitative easing (QE), also known as large-scale asset purchases, is an expansionary monetary policy whereby the central bank buys government bonds in order to stimulate economic growth and increase the liquidity from late 2008 onwards. But now the policy has been replaced by quantitative tightening.
Meanwhile, the European Central Bank has ended its bond-buying programme, and the Bank of England has halted quantitative easing as well as raising interest rates.
As the central banks are set to tighten their monetary policy, especially increasing the interest rates, it will lift the cost of borrowing for many companies and consumers. Eventually, it could impact private investment and consumer spending.
As such, the possibility for an economic slowdown is higher.
Trade War Tariffs Hit Corporate Earnings
The trade dispute between the US and China is already having an impact on US corporate earnings; the most recent one being Apple.
On Jan 2, Apple issued a letter to investors that the company has cut its revenue guidance for its fiscal-first-quarter due to the slowing Chinese economy and the trade tensions between the US and China.
It now expects revenue to be approximately $84 billion, down significantly from a prior outlook of $89 billion from $93 billion, issued just two short months ago.
This is the first time in 15 years that the company is cutting revenue expectations, sending shock waves through markets. Its share price fell nearly 10% on Jan 3 after the sales warning.
That lowered guidance showed the trade war’s impact on the tech world, and the market expects to see more casualties from trade tension.
With tariffs imposed on a variety of imports, higher trade barriers would disrupt the global supply chains and lowering global productivity, ultimately hit the world economic growth.
More import restrictions would also make tradable consumer goods less affordable, harming low-income households disproportionately.
On December 1, Trump and China’s President Xi Jinping agreed to hold off on increasing tariffs, but only for 90 days. Thus, the uncertainty is still there, and the market still has to be monitored closely for the development between the two giant economies.
Eurozone Growth Cools As ECB Ends QE
The withdrawal of the European Central Bank’s (ECB) QE stimulus programme and the possibility of ‘Hard Brexit’ would pose risks to the Eurozone’s economic growth.
After four years of QE, ECB has halted its €2.6trn bond-buying programme. This means that the eurozone is losing its vital growth driver, on which it has grown highly dependent.
ECB president Mario Draghi believes that the QE had driven economic recovery when fiscal policy and export demand were unsupportive.
However, what makes investors nervous now is that the ECB has ended its buying government debt just as the eurozone growth is slowing.
Thus, concern over the sustainability of the single currency area is flaring up again.
Meanwhile, a business survey showed the eurozone losing its growth momentum in December and is expected to mark lower GDP growth in 2019.
The Final Eurozone Composite Purchasing Managers’ Index (PMI) for December has slipped to 51.1, the lowest in more than four years, from 52.7 in November.
Brexit Saga Putting EU into Crisis
Brexit is the biggest of the economic threat for Europe. Currently, the market is worried about a chaotic ‘No-deal Brexit’, as it will hit the local banks, manufacturers and businesses.
Britain is scheduled to leave the EU at the end of March, whether terms of separation are reached by then or not.
Reuters has quoted Dieter Kempf, president of the BDI industry association as saying the biggest risk in the short term is Brexit.
If Britain leaves the EU in March without any agreement on its future relations with the bloc, this would create massive uncertainties for trade and business, Kempf warned.
With all those uncertainties in mind, the risk of a steep economic slowdown in 2019 is higher now and the recession would happen in 2020.
Nouriel Roubini, also known as “Doctor Doom”, is one of the few economists who predicted the Great Recession. He has warned that “by 2020, the conditions will be ripe for a financial crisis, followed by a global recession.”
Whether it’s true or not true, investors have to monitor these downside risks and the economic trend very closely.