Maybe a recession is looming, or maybe not and we are being misled
Finance-market investors are pessimistic: global stock markets fell around the world last week, prompting headlines such as Recession fears prompt selling in global stock markets.
Weak data from Germany and China on Wednesday helped fuel a rush for safe assets like bonds and gold, the BBC said in the report beneath that headline.
Bond market moves pointed to possible recessions in major economies.
Another BBC report, headed Are markets signalling that a recession is due?, examined the unusual phenomenon known in the jargon as an “inverted yield curve”.
This often comes before a recession or at least a significant slowdown in economic growth.
The BBC provided an explanation about the yield curve:
This warning sign is coming from the bond market, the place where governments and companies go to borrow money by selling bonds.
A bond is a promise to make certain payments in the future, usually a large one when the bond “matures” and smaller ones in the interim, typically every six months.
How much investors pay for the bond determines the yield they will get – the higher the price, the lower the yield.
One factor affecting the yield that investors want is how long they have to wait for the big final payment.
Usually, a longer wait means they expect a higher yield.
It compensates them for tying their money up for longer, when there is more risk that unexpected inflation could erode the value of their returns.
Recession concerns were raised in Germany, too, as that country slipped back into negative growth. Negative growth? It’s an economist’s way of saying the economy is shrinking.
A decline in exports dampened growth, according to official data, which comes amid concerns of a global slowdown.
Gross domestic product (GDP) fell by 0.1% compared with the previous quarter, according to the Federal Statistics Office.
That takes the annual growth rate down to 0.4%. Germany, Europe’s largest economy, narrowly avoided a recession last year.
The NZ Herald at the weekend reproduced a Washington Post article headed A recession will come, but how bad will it be?
This said a recession is coming.
But despite this week’s warning signs, we have little idea when. It could be imminent, or the economy could chug along until the heat death of the universe or, as we might call it, the Greatest Depression.
The article in the Herald also examined the question of how bad the next recession might be. This calls for a talent for seeing into the future which we doubt can be found either at the Herald or the Washington Post – or, indeed, anywhere else.
The answer accordingly was ambivalent:
How bad will the next recession be? Prognostications vary, and we don’t have great data on future events. But we’ve got plenty on what happened in the past, and we can look there for clues.
About 40 million US adults haven’t experienced a recession during their working lives.
Almost as many, including most millennials, have experienced only one since they turned 18.
That recession, the devastating Great Recession from December 2007 to June 2009, was (hopefully) not representative.
There have been 11 recessions since World War II. On average, they lasted 11.1 months, according to the official scorekeepers at the National Bureau of Economic Research. The shortest was over in just six months (1980) and is often counted alongside a follow-up recession in 1981-1982, while the longest lasted 18 months (2007-2009).
But before readers take defensive action with their investment portfolios – or worse, throw themselves from the top floor of their office building – hear this:
The White House reckons talk of a recession is fake news.
According to the Financial Times, top White House officials have dismissed concerns about a looming recession.
But they said the Trump administration was considering more fiscal stimulus, including a new round of tax cuts funded by tariffs.
“I don’t see a recession at all,” Larry Kudlow, the top White House economic official, told Fox News Sunday.
Last week, the US yield curve, widely seen as a reliable predictor of recessions, turned upside down for the first time since the summer of 2007, rattling global stock markets. But on Sunday, Mr Kudlow, director of the National Economic Council, rejected suggestions that the economy was heading for a downturn.
He cited data showing US retail sales rose 0.7 per cent in July, compared with 0.3 per cent the month before, as well as strong employment and consumer spending figures as evidence of the strength of the US economy.
“That is about as good as it gets,” Mr Kudlow said. “I think we are in pretty good shape.”
Has this relaxed you, dear reader?
Then read on:
In December 2007, in the run-up to the financial crisis, Mr Kudlow, who was a journalist at the time, said: “There’s no recession coming . . . the pessimists are wrong. It’s not going to happen.”
When asked about those comments on NBC’s Meet the Press on Sunday, Mr Kudlow said he pleaded “guilty to that late 2007 forecast”.
But he added: “This is not then. Our banks are well capitalised. Our financial system’s in very good shape.” “We’re doing pretty darn well in my judgment. Let’s not be afraid of optimism.”
Good advice. Trouble is, we may have to take a trip to Washington and the White House to find the optimism we should not be afraid of.