Issue of the week: is a global recession looming?
There are multiple signs of an impending global economic downturn – and we’re certainly due one
Every August, the Federal Reserve Bank of Kansas hosts a symposium for central bankers and other financial luminaries in the Wyoming resort of Jackson Hole. “Some years, guests have little to do but chew the fat,” said Larry Elliott in The Observer. In others, “the conclave takes place with a crisis looming”. One such year was 2008. And we may be in another. Last week, share prices slumped amid fears that “the first recession since the big crash is just around the corner”. The trigger was developments in bond markets, where yield curves have been “inverting” – indicating that investors “think there is more risk in holding short-term government bonds than longterm ones”; normally it’s the other way around. The next day, “yield curves” were being discussed all over the media – and that was worrying in itself: when “City argot becomes part of everyday parlance”, it often spells trouble. Inverted yield curves don’t always lead to a recession, but in the US, there is a correlation between the two.
President Trump reacted to “the flashing warning signs” by lashing out at the US Federal Reserve “for not cutting interest rates more aggressively”, said The Wall Street Journal. But the slowdown isn’t just a US affair. Germany and China have posted figures showing worrying “sluggishness”. Meanwhile, analysts have worried investors by slashing their third-quarter corporate profit estimates. Trump is still boasting that the economy is “doing tremendously”. But his advisers are looking at defensive “options”: cutting payroll and capital gains taxes, and possibly reversing some recently imposed tariffs. Most forecasters think the chances of near-term recession are only about one in three, said Neil Irwin in The New York Times. But it’s easy to see how one might play out. “Trade wars and a breakdown in economic diplomacy cause businesses around the world to pull back” – leading to more market tumbles, job losses and a knock to consumer confidence. “High corporate debt loads” then “create a wave of bankruptcies” – and central bank policy proves “impotent”.
The “astounding appetite for the safest of assets”, government bonds, shows something is up, said The Economist. But the world economy is still growing, albeit more slowly. “Jobs are plentiful; wages are picking up; credit is still easy.” Nonetheless, central banks are “anxious”: Brazil, India, New Zealand and Thailand have all recently cut their benchmark interest rates. And after a record ten years of expansion in America, “a downturn feels overdue”. The worry is that with interest rates already so low, “the capacity to fight one” has been “depleted”.