Market jitters, slowing growth: How close is the next recession?
Global markets tumbled on Friday with the S&P losing 1.9 percent and the Nasdaq 2.5 percent, while the FTSE saw the worst day of trading this year and closed down by 2 percent. Asian markets were markedly down in early Monday trading.
Although calm returned to the markets on Tuesday, the markets still witnessed a jarring few days. So, what happened?
There is a lot of uncertainty in the global economy. While we have heard positive noises about the US-China trade negotiations, the danger of an escalating trade war is only over if and when the two countries sign a deal.
Even if the trade tensions do get resolved, we will not be out of the woods, because the Trump administration’s focus will shift to Europe. Import tariffs of 25 percent on European cars would have a devastating effect on the German economy, as well as on companies in the supply chain. The automotive industry is a global business, which means a slowing German car industry would have ripple effects in all of Europe, Asia and beyond. Then there is Brexit, which casts a long shadow of economic uncertainty not just over the UK, but over all of Europe.
As if the above was not enough, data from the US alarmed several economists last week. The Treasury yield curve inverted for the first time since 2007. Inverted yield curves in the US have traditionally predicted a recession within a window of six to 18 months.
However, Charles Evans, president and CEO of the Federal Reserve Bank of Chicago, did warn against a doomsday scenario, explaining that the US economy was near full employment and still growing. He predicts growth for 2019 to range between 1.75 and 2 percent, admittedly lower than last year’s 3.1 percent.
Even if the trade tensions between the US and China do get resolved, we will not be out of the woods, because the Trump administration’s focus will next shift to Europe.
So much for the US. The European Central Bank (ECB) halted its course of accelerated balance-sheet tightening and anticipated rate hikes, which it had intended to pursue over the next few years. Meanwhile, the Bank of England maintained its wait-and-see policy, leaving the base rate at 0.75 percent.
This uncertainty — fears of a slowing global growth, inverted yield curves and revised central bank policies — has clearly spooked the equity markets.
However, we should not forget that the first quarter of 2019 has been extraordinary for US and European markets. Both the S&P 500 and pan-European Euro Stoxx 600 Index have rallied since the end of December. This means that some of the recent market wobbles can be explained by investors wanting to take profits toward the end of the quarter.
There is no denying that global growth is slowing and we are nearing the end of the economic cycle. However, we should be careful not to become too alarmist when one or the other indicator is negative. The global economy is still growing — all be it at a reduced speed.
What should worry us, though, are the recent policy U-turns whereby central banks halted efforts to normalize their monetary policies. The balance sheets of central banks are still bloated and interest rates are still at historic lows, which means that lowering rates or further government stimuli may not be possible when the next recession hits.
The state of the global economy and potential risks matter to all, including the GCC countries. Their sovereign wealth funds are heavily invested in global stock markets. Most of their economies still depend on oil, and the demand for and price of oil heavily depends the fortunes of the global economy.
- Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources