(Source: The Guardian)
The ongoing fear is that the global economy is heading for a recession. Despite notable financial figures coming out and clearly stating that this is an unlikely scenario (Federal Reserve Chair Jerome H. Powell stated that “the most likely outlook for our economy remains a favourable one with moderate growth”), the warning signs are there for all to see.
The escalation in the US-China tariff war, which has seen the US impose tariffs on goods from China, in direct response to China’s alleged undervalued currency (to undercut US goods). This has seen most countries report a downturn in trade since these tariffs began 18 months ago when Trump instigated his ‘America first’ campaign.
Following this, the US economy has begun to slow after a buoyant start under Trump’s administration. His income tax cuts and corporate giveaways prompted huge growth which had to inevitably come to an end. Whilst there is still no economic contraction, growth has slowed considerably.
Last year, the Federal Reserve increased interest rates in an attempt to calm things down, and it has been these increased borrowing costs, combined with the above-mentioned tariff war with China that has hit US industrial production, causing it to decline for the first time in a decade.
The German economy contracted by a small margin in the second quarter (0.1%) but is expected to suffer a second and larger drop in the third quarter, despite the expectation of a £45bn boost to the German economy.
Two consecutive quarters of negative growth is the technical definition of a recession, and the extra cash is expected to be too little, too late to prevent this from occurring.
If the German economy is to have any chance of turning round, much depends on the a recovery in China, where Germany now sells much of its industrial equipment and cars.
Chinese Debt Crisis
China has practically been the driving force for the global economy since the 2008 financial crash, but what a lot of casual observers have failed to notice is that the country is in the throes of a full-blown debt crisis.
The state, along with consumers, have borrowed heavily during this period, and Chinese banks are weighed down by loans that will never be repaid.
Every time Beijing has tried to rein in excessive consumer and corporate lending, the global economy has reacted, forcing China’s policymakers to loosen credit again.
China’s industrial growth is at a 30-year low (4.8%), with the eventual aim being to become more self-contained, but they acknowledge that this will be a long haul.
Finally, the elephant in the room, Brexit. The uncertainty surrounding Britain’s future, and whether or not it remains as part of the world’s largest trading bloc or heads out into solitary waters has already damaged investment and GDP growth.
Should the UK leave without a deal, many economists believe that the damage will be severe. A multitude of world financial bodies (the IMF and World Bank amongst others) believe that the UK leaving the EU without a deal will take a toll on global growth, bearing in mind that the UK is the world’s sixth largest economy.
Other countries in trouble
A string of countries are currently in recession or have suffered a contraction. Iran faces a blockade by the US and is unable to sell its oil, Argentina is weighed down by enormous debts and Venezuela is in political and economic crisis.
Whilst international investors don’t worry much about these countries, as they have traditionally been ring-fenced, South Africa and Turkey pose a much greater problem. Both countries are more integrated in the international markets, which means a debt default would have a far greater impact.
Financial market jitters
Signs from the international money markets are mixed. Stocks in the US and Germany are at historically high levels, and many investors are buying up the so-called ‘safe haven’ investments such as gold – a similar pattern to that which preceded the 2008 financial crash. A multitude of factors indicate that the US economy could be in dire trouble as early as next year.
There is never a guaranteed way to predict what the economy will do next, but there is no doubt that we are in a period of uncertainty, and the outlook is definitely not rosy.
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