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Forex

The World Economy: Fears of a New Recession

The World Economy: Fears of a New Recession

Dow Jones, US economy, World economy, New Recession

AtoZForex.com Lagos – The world economy is creeping closer to a halt, and possibly a backslide. From the US, to China and even emerging markets. The United Nations is the latest multinational body to cut its global outlook for this year to 2.8pc. The danger alarms of a new recession haven’t gone off yet, but data shows that if traction is not picked up soon, something might go wrong as the growth pace is only slightly above the 2.5pc rate that used to be regarded as a recession for the international system as a whole. JP Morgan estimated that the US economy contracted at a rate of 1.1pc in the first quarter, much worse than initially believed.

HSBC’s Stephen King and the US economy

He warned that the global authorities have alarmingly few tools to adequately handle the next crunch, given that interest rates are already at zero levels across most of the developed world, debts levels are at or near record highs, and there is little scope for fiscal stimulus. He said:

“The world economy is sailing across the ocean without any lifeboats to use in case of emergency,”

In his report themed “The World Economy’s Titanic Problem” – he points that the US Federal Reserve has had to cut rates by over 500 basis points to right the ship in each of the recessions since the early 1970s. “That kind of traditional stimulus is now completely ruled out. Meanwhile, budget deficits are still uncomfortably large,” he said.

The authorities are normally able to replenish their ammunition as recovery gathers steam. This time they are faced with a chronic low-growth malaise – partly due to a global ‘savings glut’, and increasingly to a slow ageing crisis across most of the Northern hemisphere. The Fed keeps having to defer its first rate rise as expectations fall short.”

According to this report, each passing US recovery gets weaker than the previous, with the average growth rate falling from 4.5pc in the early 1980s to nearer 2pc now. “Fiscal stimulus – a novel idea at the time – may have been controversial, but the chances of it working to boost economic activity were quite high given the healthy starting position. Today, it is much more difficult to make the same argument,” he said.

The Chinese Situation

The law of diminishing returns may have well hit the Chinese economy. As pointed out by Dario Perkins from Lombard Street Research, the Chinese economy is in a worse condition than the authorities admit with a likelihood of downright contraction in the first quarter. Rail freight has been falling at near double-digit rates. Electricity use has turned negative. Andrew Roberts from RBS says China accounted for 85pc of all global growth in 2012, 54pc in 2013, and 30pc in 2014. This is likely to fall to 24pc this year. “If there is only one statistic that you need to know in the world right now, this is it,” he said. The rest of Asia still struggles as well. Japan keeps disappointing. Its exports to China have fallen 15pc over the last year. Korea is flirting with recession

Weak Emerging markets

A ripple effect from the China-driven commodity bust has also hit Russia, Brazil, Argentina, and Venezuela as they are all contracting sharply. The UN says the growth rate for the emerging market nexus (ex-China) has dropped to 2.3pc from an average of 6.5pc in the glory years of 2004-2007. The bottom line of Stephen Kings paper is to avoid any premature tightening or policy error that could crystallize the danger. As he puts it: “Many – including the owner of the Titanic – thought it was unsinkable: its designer, however, was quick to point out that ‘She is made of iron, sir, I assure you she can’.”

The great hope – and most likely outcome – is that the recent monetary expansion in the US and the eurozone starts to gain traction later this year. Broad ‘M3’ money data – a one-year advance indicator – has been growing briskly on both sides of the Atlantic. But nobody knows for sure whether the normal monetary mechanisms are working. Financial markets across the world may well to be setting up for a potential bust as well with the Nikkie, Dow jones, DAX and FTSE all at multiyear highs.

The Dow Jones hit its all time high of 18,451.13 on Tuesday, May 19, 2015.

Dow Jones Dow Jones

After hitting the all time high, prices have been range bound between the resistance of 18,451 area and the support ares of 17646 and 17453. A downside breakout or bust could lead to a renewed bear market, a potential threat to the economic recovery.

Disclaimer: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of AtoZ Markets.com, nor should they be attributed to AtoZMarkets.

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