Are we headed for another recession?

The question is a subject of much debate. But one thing is clear - cautionary signs of a looming recession have emerged. And few dare to ignore these signs this time round after having missed the early clues of the 2008/09 Global Financial Crisis about 10 years ago. At present, the narrowing of the yield spread between the 10-year and two-year US treasury notes is stoking fears of a recession once again. Generally, when the yields on longer-dated debt papers are much higher than those of shorter-tenured ones, it is considered healthy for the

economy, as it indicates banks are prepared to lend. But when short-term rates are higher or close to long-term rates, banks could stop lending. When the lending stops, the economy slows down or stagnates. Separately, the high levels of debt held by emerging-market (EM) economies, of which Malaysia is a part, is also a concern. While many EM economies have weaned themselves off foreign currency debt, and have been increasingly turned to issuing bonds in domestic currencies, they remain more exposed to foreign-currency debt now than 10 years

ago. This puts many EM economies at risk, as they face the prospects of having to repay their foreign-currency debt out of revenues in their depreciating local currencies if the US dollar continues to strengthen. The US is on the path of raising interest rates to “normalise” its monetary policy. There are fears over the impact on EM when the US raise interest rates as that could cause a masive outflow of funds from EM back to the US - a phenomenon which will lead to the strengthening of the US dollar and weakening of EM

currencies. As it stands, developed economies from the US to Europe and Japan are all running full steam ahead. The same cannot be said of EM. China, which is the second-largest economy in the world, is battling a slowing domestic economy due to structural problems. On the external front, the yuan is under pressure, as the country fights a trade war against the US. Malaysia and EM as a whole cannot insulate themselves from the troubles of China. So, the question is, will EM be the one leading the downturn this time round.