A “global recession-obsession” is gaining momentum. To some, this is enough to create one. Fears are being fed by an alarming slowdown of growth. Armchair analysts check the calendar and realizing that it’s been a decade since the last one, conclude that we’re due for our next recession. While significant, the passing of time alone is a feeble gauge of impending economic downturn. But is the crowd right—is recession imminent? And if so, is it going to be a “bad one”?
Current statistics are ominous. Trusted leading indicators have soured for months. Buyers in corporations the world over—who incidentally have a powerful incentive to get their forecast right—foresee economic decline in the coming six months. This is an about-face; not long ago, they were almost universally bullish about near-term growth. Another dependable gauge is the yield curve. When it inverts, recession has in the past been unavoidable. It has recently swooned, inverting briefly, and remains very close to that point. Composite leading indicators in multiple countries have likewise softened in recent months.
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What about actual data? Industrial production was reviving impressively in 2016 and 2017, but has now slowed to a crawl. World exports have very recently dipped into a recession of their own. True, these are just parts of the economy; what then do the aggregate numbers say? Recent gross domestic product (GDP) releases from global heavy-hitting economies show a perplexing shift. Business investment appears to be in freefall. Exports are also swooning. But at the same time, consumption—which in most economies accounts for 60% of activity—is still rising. This may not offend the untrained eye, but current movements are actually upside down. Consumers are one of the first sectors to go into economic slowdown, hard on the heels of a weakening housing sector. Then international trade slows, and finally—sometimes with a multi-year lag—business investment joins in. What’s behind today’s contrary shift? It’s probably one of the clearest signs that global slowdown is policy-induced. The uncertainty of actual and threatened tariffs, torn-up free trade agreements, walls, border adjustment taxes and the like has arrested trade flows and provoked an investment hesitation, which is grinding world growth to a halt.
Time isn’t on our side. The longer resolution takes, the more likely we’ll default into recession. Germany is already there, the United Kingdom is close, and Mexico is one key emerging economy that’s just a hair away from the zero-line. Clearly, the current probability of global recession is significant, and rising every day agreement eludes the combatants. So, if we do trip into one, what will it look like?
Doomsayers expect a deep one. They’re quick to point out that we don’t have the policy firepower we had in 2008. Governments are indeed far more indebted, putting limits on fiscal policy. Interest rates remain alarmingly low in large parts of the world, constraining monetary policy. Financial institutions might have spent the past decade solidifying their capital, but the bevy of new financial regulations is not recession-tested; it’s not clear whether the financial world will be there for business or withdraw more quickly than in the past.
There’s no fundamental need for a recession
There’s no debating these facts, but we believe, as stated in Export Development Canada’s recently published Top 10 Risks guide, that if a global recession occurs, it’ll be a shallow one. Why? First and foremost, if recession is policy-induced, then intense pressure will be on the inducers to undo the damage. Against the huge costs of recession, both politically and economically, politicians would be urged to reach agreement, and quickly. This applies equally to the United States-China and U.K.-European Union impasses—and in each case, to both sides of the argument. Reaching agreement would be a great relief to businesses that are holding back regular activities as they hope for a more stable policy environment.
A second and powerful reality is that there’s no fundamental need for a recession. Sure, there are labour constraints everywhere, but the world has only just arrived at that point, and there are still many viable creative alternatives to localized labour constraints. Elsewhere, there are significant chunks of the economy that never recovered, thanks to the tepid growth in most of the years that followed the Great Recession. This points to ample evidence of pent-up demand in the “engine” economies of the world, the exact opposite of what usually precedes recession. There’s actually capacity for a few more years of growth.
Having said this, if a recession occurs Canada will be harder-hit than others. Unlike most of the developed world, we don’t have pent-up consumer demand. In fact, debt ratios of Canadian consumers today are a lot higher than they were for U.S. consumers in 2008, and they’re rising. And unlike America, where there is huge demand for new housing, Canada’s homebuilding has been well ahead of demographic demand for a number of years. In the face of weakening global demand, Canada wouldn’t have a strong domestic economy to fall back on.
Is recession inevitable? Absolutely—the economy still goes in four-stage cycles, and recession is one of them. The question is timing. Is recession imminent? Fundamentals say no, but it’s currently up to a handful of key world leaders. Our base case forecast predicts that the enormous cost of not doing so—both personally and politically—will force agreement on today’s major trade impasses, by mid-2020. That will be just in time to rescue the world from recession…but only just. The more certain trade environment that follows is expected to unleash demand that the disagreements have held back, and the demand that was never fully satisfied in the decade following the Great Recession. It’s definitely a high-stakes game.