Signs of impending global crisis

While Russia seems already used to the “August crisis” expression, this year the last summer month was marked by impending crisis warnings coming from abroad. In a very short time, people have been flooded by a landslide of evidence suggesting the world economy is in for at least a new recession, if not a sharp meltdown.

All because of Trump

Most observers blame the trade war Donald Trump is waging on China, calling it the driver of the looming turbulence, which can lead to a slowdown of two of the world’s largest economies – both also seen as drivers of the global economy. August 2019 began with a new buildup of tension: on August 1, the US president announced his intention to introduce a 10% duty on the remaining Chinese imports from September 1, putting $300 bln worth of imports in jeopardy.

China responded by threatening to impose an embargo on US agricultural produce. Experts of the Russian Analytical Credit Rating Agency (ACRA) believe the US economy can contract by 0.7% and China’s growth slow down to 4-4.5% by 2020 as a result of the confrontation.

These threats are taken quite seriously in the US. A recent Bank of America survey of stock market managers showed that one third of them expect a global recession in the next 12 months – the highest number since 2011. On August 14, the country’s two largest automakers, Ford Motor and General Motors, told Reuters they had already begun preparing for a possible recession caused by the US-Chinese war, in particular by building up cash reserves. Meanwhile, China’s industrial production growth rate hit a 17-year low; the M2 money supply growth also slowed to a record low.

The Magic of Numbers

Another factor worth consideration is the economic cycle theory, which says the period between crises is usually 10-12 years. It has been almost 12 years since the 2008 global crisis so it’s about time. Also, the US economy has been experiencing an uninterrupted boost for 11 consecutive years, which is an absolute record of growth in the American economic history. Obviously, the duration itself does not matter so much but the progress will not continue forever.

Another important sign of an impending recession is the alarming and unusual situation in the US bond market, or so-called ‘inverted yield curve’ when the yield on long-term bonds falls below the yield of short-term bond. As a result, investors are no longer confident in long-term investment. This happened on August 15 and immediately after, the Dow Jones Index plunged by 800 points (3.05%) in its lowest downfall of 2019. However, the problem is not the Dow collapse rather than the fact that in the past 60 years, the inverted yield in the US has been followed by a recession in nine cases out of ten, or in 1957, 1960, 1969, 1973, 1980, 1981, 1990, 2000 and 2007.

Germans retreat

In addition to the United States and China, the economists are now concerned about Germany. On August 13, the latest ZEW Economic Sentiment Index was released – and, as it turns out, it has dropped to the historic low since December 2011. A little later, a monthly survey by the Central Bank of Germany (Bundesbank) was published in which it was stated that after the GDP decrease by 0.1% between April and June, the negative trend in the German economy may return in Q3 2019. Therefore, the German economy is facing a recession – and Germany is Europe’s locomotive.

Interestingly, one of the reasons for the economic slowdown quoted by Bundesbank is the Brexit-related decrease in the exports to Great Britain. Meanwhile, Great Britain itself had a negative economic growth in Q2 although it is hard to say whether this effect will last. Germany’s Federal Ministry of Finance is already working on plans to support the economy with the state budget which may require resorting to a budget deficit.

“The German economy is being affected by global trade shocks and the situation in the processing industries of other countries, in particular, the crisis in the global car making industry and the reduction of excess production capacities in China. All this prompts the European Central Bank to make a decision on the launch of new “stimulating” measures at the upcoming meeting in September,” VTB Capital says.

Current concerns

All such ‘precursors’ of an economic crisis would not have been so worrisome if it were not for other concerns and challenges. First of all, it is the possibility of increased tensions between the US and China, as well as between the US and Iran. In addition, there are talks about the possible default of Argentina related to the recent elections won by the center-left opposition, which led to a crisis on the currency and stock markets. Let alone such a strategic factor as growing global debt, which has reached a record $246 trln: it is three times bigger than global GDP.

By the way, in the US, despite the lesson of the mortgage crisis, banks have begun issuing even more loans to the population. According to the recent report by the Federal Reserve Bank of New York, households have outstanding loans of $13.86 trln, a historical record, with 68% of this sum being mortgage loans.

Nobody trusts Russian industry

As for the crisis in the Russian economy, two analytic reports predict it will happen after 2020. The first one is a review named Business Activity of Russian Industries in June-July 2019, prepared by the Center for Business Tendencies Studies of the Higher School of Economics. However, this review mentions the disagreements between the US and China as the main threat.

A more concrete (and alarmist) opinion was expressed in an analytical note by the Stolypin Institute for the Economy of Growth, whose supervisory board is headed by Presidential Commissioner for Entrepreneurs’ Rights Boris Titov. According to the institute experts, the economic growth of 0.5% of the GDP recorded in the first quarter by Russia’s Federal Service for State Statistics (Rosstat) is due solely to achievements of large enterprises and the state sector, while small and medium-sized businesses are showing diminished economic activity. During this year’s first six months, the number of the employed in the small and medium-sized business segment reduced by 1.6%, with the number of such businesses decreasing by 7-8% as compared to the annual indicators. The recession began last August.

“A technical recession could be observed in the economy as early as in 2019 and not 2021,” the analytical note says.

It should be noted that these statistics caused concerns of many experts. As regards certain industries, the past six months have shown the worst indicators since the economic crisis of 1998, Oleg Filippov, associate professor at the Russian Presidential Academy of National Economy and Public Administration, told RBC. Meanwhile, he added, the number of owners seeking to sell their small and medium-sized businesses has exceeded the corresponding number in the past eight or nine years. Renowned economist Vladislav Inozemtsev even went further, saying that the success of large enterprises reported in the official statistics is inexplicable; it makes one “either to suspect manipulating numbers or to consider budget investments, which are not unlimited, as a source of growth,” he wrote in the Novyye Izvestiya newspaper.

To remind, Russian Minister of Economic Development Maxim Oreshkin has already mentioned the possibility of a recession in 2021, citing household debt load as a reason. Yet, this issue triggered a serious disagreement between the ministry and Russia’s Central Bank. The major negative background for all these phenomena is the decline in the population’s real income that has been observed over the past six years; in this year’s first six months, it fell again by 1.3%.

To conclude on a more optimistic note, I could site Assistant to the US President and Director of Trade and Manufacturing Policy, Peter Navarro, who believes the US economy is in no danger of a recession. Yet, many experts think that forecasting a crisis is like playing roulette.

By Konstantin Frumkin, Managing Editor, Invest Foresight

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