An overwhelming amount of economists are currently talking about the next recession and when, why and how it might hit. While there aren’t as many gaping holes in the current world economics as there was in 2008, there still are potential problem hot-spots which could lead to a recession with severe consequences. Since the recession of 2009, the world has been on one of the longest rallies with S&P, DOW and NASDAQ composite on a steady climb. While this is only one indicator, it serves as a good introduction to the overall global trend of economic improvement and uptrend. However, as it is a common belief that good times never last, the majority of the biggest economic newspapers such as Time, Economist and Forbes and experts of economics alike have already started to push out predictions about the forthcoming recession. While one can never be certain when, how and why the next recession might hit, it is good to look at the potential indicators and reasons for a potential slowing or crash in global economics in the near future. Here are our top reasons for why the next recession might happen:

The Borrowing Streak of Rising Economies

Since the last recession of 2008 and 2009 many emerging economies such as China and India have been on somewhat of a borrowing binge with external debt on a stable rise every year. The expansion of external debt for these countries combined with the overall increasing impact and importance of these countries on the global economy might prove to be a potential weak spot in the world economy as the debt becomes larger and harder to repay. And it seems that harder to repay it will become as the US Dollar is strengthening and thus making it harder for these countries to repay their further expanding external debt.

The US-China Trade War

Another catalyst for the next recession might lay in the further increasing trade tensions between world economies. The cause behind this tension can be explained by the fact that for a long time China has had an export surplus in trade with the US. This has lead to a trade imbalance which the Trump Administration is aiming to “fix”. The fix comes in the shape of trade tariffs on certain Chinese goods to which China has already responded with similar tariffs on US goods. This trade war in total has resulted in the strengthening of the US economy and thus the strengthening of the US Dollar. Which in result contributes to the problems of debt for China and other rising economies.

The Geopolitical Risks

With the US-China trade war only to escalate it isn’t hard to see why it is an economic risk not only for the two super-countries involved but for the whole world too; however, there are other political risks brewing in parallel in seemingly more stable parts of the world too. For example, a key problem in the Eurozone is related to Italy and its external debt problem as Italy has become the first country in the history of EU for its budget plan to be rejected by the EU due to the large spending plans and further increasing external debt. This has created noticeable tension in the EU and is to be considered as a major potential weakness in the EU’s economy. Other problems such as Brexit and the current refugee situation has also put a strain on the EU both economically and politically.

How to Spot the Recession When It Hits?

 

So the recession is certainly not beyond the realms of possibility, and when it finally hits, you’ll easily notice that, for sure. But how could its advent be spotted in advance? There are several major indicators that may help you to get prepared in time.

 

Firstly, it’s the yield curve. This indicator is mentioned by all the major analytics who are writing on the issue of the next recession. Essentially, it is a comparison of short-term interest rates and long-term ones. One should watch out for negative values of this indicator – it correlates well with recessions (the inverted curve was observable before all the recessions since 1960, according to Marketwatch) – although, of course, it’s not advisable to base one’s judgments on this indicator alone. What does the correlation stem from? Crudely simplifying, negative values of the index mean that it’s not profitable for banks to lend; and this sort of circumstances is clearly well-tied to economic downtrends.

Another harbinger of recessions is the decline of consumer sentiment. The same picture was observable both at the beginning of the Millenium and in 2008: the index goes down, then the recession strikes. There is no particular value of any indices that measure consumer sentiment to be feared, but the overall trend should be monitored so that the early signs of coming recessions could be spotted.

Finally, one should better keep a close eye on sudden spikes in the share values of large companies. Even though almost nothing can be told from observing one particular company’s price, sudden spikes are no good for the overall state of the economy. They may (or, of course, may not) be signalizing about very high volatility, speculation, and overvalued assets – the array of factors broadly associated with recessions. It was discussed in our previous article – one should watch out for the patterns similar to the ones of the dot-com bubble.

And, of course, apart from the graphs – it’s always a good idea to be aware of what happens around the globe, paying attention to the developments of the CN-USA Trade Wars and other aforementioned risk factors. Could one really predict the arrival of a new recession on the basis of the indicators that we brought up in the article? It may be doubtful, but using the combination of curves monitoring and economic thinking, one might find itself in a better spot than in 2008 when the world’s economy eventually stops its growth.

Authors: Hleb Birylau, Raivo Lismanis

 

Sources:

https://tradingeconomics.com/china/external-debt

https://tradingeconomics.com/india/external-debt

https://tradingeconomics.com/italy/external-debt

https://www.marketwatch.com/story/how-to-predict-the-next-market-downturn-2018-07-27

https://www.forbes.com/sites/billconerly/2018/05/06/signs-of-the-next-recession/#2b953a9d37cf

http://uk.businessinsider.com/interest-rate-spreads-close-to-signaling-recession-2017-6

https://www.marketwatch.com/story/consumer-confidence-climbs-as-rising-wages-offsets-inflation-upturn-2018-06-15