Are we at risk of another global economic crisis?

“Crisis” is a phase of the economic cycle. The US tried to use “recession” instead to avoid unnecessary panic among investors and the general public.

The world never stands still. Like global economy, the economy of an individual state is a dynamic system with its natural phases. The world has seen plenty of crises and depressions in the past.

In 1857, the US was hit by a banking system crisis when the stock market collapsed and a great number of railroad companies went bankrupt. Year 1873 saw increase in the amount of loans and real estate market speculation as well as some problems in Germany and Austria. First World War: the belligerent parties are redistributing and selling foreign stocks to finance their military activity over a downturn of the commodity, stock and currency markets. Then, of course, there was the asset bubble of 1929 in the US.

In 1957, Industrial production in developed economies (United States, Great Britain) drops by 4% leading to devastating unemployment. Over 1973-1974, the US, Japan, West Germany, Great Britain and other countries experienced a slump in production and real income.

An energy crisis happened in the 1970s when OPEC countries tried raising prices and reduced oil production. In 1987, Dow Jones Industrial plunged by over 22%. Then there was the Mexican peso crisis of 1994-1995. Fearing an economic crisis in the country, investors started to promptly withdraw their capital. Thus, in 1995 over $10 bln was funneled out leading to a banking crisis. The same thing happened in 1997 in Asia as national currencies lost value and Southeast Asian economies overheated. 1998: a crisis in Russia, with a large national debt and low commodity prices in the world. The lending market gets hit in 2007 to 2009 resulting in a mortgage crisis.

What all these events have in common is an unbalanced credit policy, increased customs duties on imports and, as a result, drop in purchasing power, drop in industrial production, speculative stock and real estate market rallies. Also, investment drained from developing markets.  

Current developments in international markets

For several years, the United States and China have been global economic leaders. The top ten also include Japan, Germany, England, France, India, Italy, Brazil, and Canada. These countries amount to over 60% of the global GDP; over the past year, we have seen it grow from $81 tn to $85 tn – yet, there is an obvious slowdown, which, together with other indicators, should raise concerns. The global unemployment rate has decreased in general, yet the labor quality and conditions remain a complicated issue. In the United States, President Donald Trump wants to build a wall along the US-Mexico border, while in Europe, a situation remains difficult with refugees and immigrants from the Middle East.

The US trade relations with Europe and China are causing huge tensions; along with the protracted process of Britain’s exit from the European Union, this all is resulting in a vast pressure on the global economy and a possibility of its further downturn.

In my opinion, we are entering a recession phase, which is proved by a number of indicators – for instance, in the United States. Despite some positive data, GDP growth rate in decreasing and income is declining; the unemployment rate, although kept within reasonable limits, is under pressure. There is an obvious loosing of the monetary policy as a regulation tool. Industrial activity and PMI indicators have been falling since last October, from 56 to 50. This has led to economic capacity utilization decreasing from 79 to 77.5 since early 2019. Industrial production in the United States has also dropped since last October.

Meanwhile, financial resources tend to increase since 2017 – which is obvious amidst a decline in consumption. According to this year’s reports, corporate income is also under pressure. In this year’s second quarter, US consumer sentiment fell from 100 to 92. Also, a decline in the consumer loan growth has been observed since last year.

Similar trends are occurring on other nations’ economies as well. Common problems are also threatening developing economies. Investment capital outflow as well as low cost of crude materials are causing pressure. We have entered a recession phase. How fast can the global community respond to it and how can we benefit from it? After all, one can not only lose but also gain from a financial crisis.

By Pavel Zelensky, Trading Desk Senior Trader, Hedge Fund KHRSV LTD

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