All you need to know about the Global Recession of 2020

During the period between July 2008 and June 2009, major economies suffered a domino effect of the US recession after the country’s housing market collapsed. It was the most severe economic crisis witnessed in the US since the Great Depression in the 1930s.

In the 10 years that followed, we saw the world enjoying a synchronized economic acceleration. The three years from 2014 onwards were characterized by falling oil and commodity prices. This in-turn moderated inflation. Global trade was surging and America booming; China’s slide into deflation had been quelled; even the eurozone was thriving until recently in 2019.

Today, the biggest economies in the world like China, Great Britain, US are on a major economic slowdown. Even India’s economic growth is on a serious decline. Weaker growth in both advanced and developing countries is showing signs of the possibility of a global recession in 2020 as a clear and present danger, the UN has warned. A majority of economists in the United States are of the opinion that the next Recession is coming; and unfortunately, all signs are pointing towards the looming Recession 2020. We can expect that this time, the Financial Outbreak will be massive and also quoted as the “biggest so far.”

Before we get into what the reasons contributing to the 2020 global recession are, let’s understand what a recession means:

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 What is a recession?

A recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in real GDP in two successive quarters.

Recessions are characterized by a rash of business failures and often bank failures, slow or negative growth in production, and elevated unemployment. The economic pain caused by recessions, though temporary, can have major effects that alter an economy. 

Factors that Cause Recessions:

  • High interest rates: They are a cause of recession because they limit liquidity, or the amount of money available to invest.
  • Inflation: It refers to a general rise in the prices of goods and services over a period of time. As inflation increases, the percentage of goods and services that can be purchased with the same amount of money decreases.
  • Reduced consumer confidence: If consumers believe the economy is bad, they are less likely to spend money. This will cause them to demand less.
  • Reduced real wages: Falling real wages means that a worker’s paycheck is not keeping up with inflation. The worker might be making the same amount of money, but his purchasing power has reduced.

Why do many economists feel that the global recession is near?

It is because of the Inverted Yield Curve:

The major recession indicator is the inversion of the benchmark US yield curve. In all nine US recessions since the 1950s, a key observation made by economists is the inversion of this curve. 

What is the Yield Curve, and when does it become ‘Inverted’?

The yield curve is a graph depicting yields on U.S. Treasury bonds at multiple maturities. It shows the yield (interest rates) an investor is expecting to earn if he lends his money for a given period of time.  

A normal yield curve is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time. If you think about it intuitively, if you are lending your money for a longer period of time, you expect to earn a higher compensation for that. 

However, an inverted yield curve occurs due to the perception of long-term investors that yields will decline in the future. An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of an upcoming recession. When investors expect longer-maturity bond yields to become even lower in the future, many would purchase longer-maturity bonds to lock in yields before they decrease further.

The increasing onset of demand for longer-maturity bonds and the lack of demand for shorter-term securities lead to higher prices but lower yields on longer-maturity bonds, and lower prices but higher yields on shorter-term securities, further inverting a down-sloped yield curve. Thus, an inverted yield curve is often taken as a sign that the economy may soon stagnate or slip into a recession.

 Now, let’s look at the potential indicators and reasons for a global recession:

  •  US Trade War with China

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President Trump’s on-again-off-again execution of the trade war with China and other countries has fed uncertainty into businesses’ decision-making. The conflict has made it difficult for many global firms to plan their operations and invest. Real fixed investment is restrained in the trade war scenario, reflecting losses in real exports, financial stress, declining equity prices, and reduced foreign investment in emerging markets targeted by US import tariffs. Turbulence in global markets could reduce consumer confidence, and lead Americans to pull back on their buying which will affect demand. Or more directly, if businesses pull back on investment spending, they may also make moves that reduce consumers’ incomes, including layoffs, hiring freezes and cuts to overtime. 

Other countries are hit indirectly through weaker demand for their own exports, either through supply chains or in response to weaker global economic growth. 

  • Oil Prices

Oil prices have been swinging higher and lower depending on shifting sentiment between the US and Iran. If US confrontation with Iran escalates into a military conflict, then global oil prices could spike in the future. 

The recent killing of Iran’s General Qassem Soleimani by an American drone has already soared tensions between the two. Following that, oil prices in India jumped by $3 a barrel. History shows that oil price spikes — not financial panics — are the leading cause of recessions in modern America. Japan, India and South Korea would be some of the most vulnerable economies to a Persian Gulf war due to their heavy dependence on the region’s crude oil. India imports more than 80% of its oil and around two-thirds of that comes from the Middle East. Every 10% increase in the price of a barrel of crude widens India’s current-account deficit by about 0.4% of gross domestic product, Sonal Varma, chief India economist at Nomura Holdings Incorporated said in late June. 

  •  No-deal Brexit

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There is an increased risk of no-deal Brexit in the UK, as it is clearly visible that the no-deal Brexit will push the UK into recession, said Bloomberg. It would eliminate Britain’s tariff-free trade status with the other EU members. Tariffs would raise the cost of exports. That would hurt exporters as their goods became higher-priced in Europe. Some of that pain would be offset by a weaker pound. In the days following a no-deal Brexit, it’s reasonable to expect consumer confidence will slide and investment will fall. 

  •  Hong Kong Protests

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Amid Hong Kong anti-government protests, the city’s economy expected to shrink 1.3% for the year 2019-2020. Since the protests began, triggered by a now-withdrawn extradition bill, various industries have paid a heavy price, mostly because of an abrupt tourism downturn and weakened consumer sentiment. Hong Kong being one of the financially important hubs of Asia, will have an impact on its neighboring countries.

Other than the above points, there are more problems like China’s economic slowdown may have been inevitable — the country faces a plethora of structural problems — yet a trade war with the US has not helped.  Elsewhere in Asia, South Korea has its own trade dispute with Japan over compensation for wartime forced labour. India faces a credit crunch following its experiment with demonetisation, introduction of GST, low confidence in the government. Germany, the linchpin of European industry, has not only suffered from a slowdown but also a weakening UK, suffering from the effects of the Brexit turmoil.

 

What happens during a recession?

  •  Unemployment

During the Financial Crisis, the firms produce very less, and therefore, they require fewer employees. Nevertheless, some of the firms even go out of business during this period, causing the workers to lose their jobs.

 

  • Saving Ratio Increases

 

If people have a fear of losing their jobs, then usually people don’t want to spend or lose the money they have and instead start saving more money. This makes the Downturn even worse as it reduces the consumption rate. Individually, everyone is doing the right thing by keeping, but as everyone targets on saving, then on a total consumer spending decreases.

 

  • Fallen Interest Rates

 

In Stagnation, interest usually falls. This is all because inflation is lower and the Central Bank tries to stimulate the economy. Lower Interest rates usually decrease the cost of borrowing and encourage investing and consumer spending.

 

  • Fallen House Price

 

Usually, the House Price falls before Stagnation strikes, and this is one of the critical cause of Recession. During this time, unemployment increases, people don’t want to invest in housing as they can’t afford mortgages, so home repressions become common. This leads to an increase in housing availability and decreased demand for it. This is one of the primary reason for the 2009 Recession.

 How can we survive a recession?

  • Start Hoarding Your Pennies:

Start stocking away a little cash to give yourself a financial cushion, an emergency fund in case you get laid off. Once you have an emergency fund goal in mind, figure out how much of each paycheck you’ll need to set aside to reach your goal in three months, six months, a year.

  • Get a Side Gig:

Losing your job would be a painful blow to your bank account unless you’re able to find new employment quickly. That’s why it’s best to diversify your income if possible. The simplest way to do that is by starting a side gig. You can hustle up extra money driving with Ola or Uber on your own schedule.

  • Pay Down Your Debts

Here’s why credit card balances are the devil: If you don’t pay off your balance every month, interest charges will keep eating away at your income. Paying off your credit cards now will free up money in the future — money that will get you through hard times.

  • Reduce discretionary spends

They say a penny saved is a penny earned. In a slowdown, you should examine your expenses to identify the ways to earn more. Tweak your lifestyle and budget to reduce discretionary spends and defer big-ticket purchases. 

  • Diversify with gold, US funds

It is always a good idea to diversify the portfolio to reduce the risk. During times of uncertainty, investors tend to flock to the safety of gold—this is evident in the sharp rise in price of gold in recent months. Experts maintain that investors should keep around 10-15% of their portfolio in gold. Investors who had taken some gold exposure would have been partly cushioned from the recent slump in the equity market. 

  • Opt for less volatile funds

In the prevailing market situation, hybrid funds are best placed to protect the downside for the investor. These are structured to limit the volatility in returns and suit investors who can’t stomach ups and downs, yet need some equity exposure. Hybrid funds come in different flavours.

Conclusion

The bad news is that recessions are pretty inevitable, meaning sooner or later, one will land. The good news is that the economy eventually recovers. If not in 2020, the global recession has chances of occurrence in the recent coming years if the above-mentioned causes are not mended and taken seriously. In an interview with Bloomberg on July 2, 2019, Nouriel Roubini said that the US disputes with China and Iran will divide the world and spark a global recession in 2020. The consequences of this trade war and tech war and the Cold War are the beginning of de-globalization and the decoupling of the global economy. Even if the Government of other countries say that they are good to go and can face the next slump and they will cause no damage, experts suggest that it is better to save some Cash Reserve that is suitable for at least a year.

-Dhwani Shah

References and Further Reading:

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