There is increasing talk of a certain ‘chill in the air’ that is not exactly connected to the winter around the corner. It’s the economy – ‘is there a global recession coming’ is the question on everyone’s minds, from economists to opinion makers, business leaders to the regular working professional, who is looking at the situation and wondering what happens to their investments.
There are some answers to be found in the 2019 International Monetary Fund’s (IMF) World Economic Outlook report (1) released only this October. Accordingly, global growth is predicted to be 3% for 2019, the lowest since the global financial crisis of 2008. In fact, this figure is a 0.3% point drop from the April 2019 outlook. The IMF has termed this a “synchronized slowdown.”
It’s not the IMF’s report alone. The UN Conference on Trade and Development’s (UNCTAD) Trade and Development Report 2019 also talks of world economy entering troubled waters. It projects global growth drop to 2.3% in 2019, compared with 3% in 2018.
Some of the factors that have led to this slowdown, or an impending recession include the Sino-US trade war, US growth slump, Chinese debt crisis and geopolitical uncertainties such as Brexit, and The IMF report also notes that in a few major economies such as India, Mexico, Russia, Brazil and South Africa, growth in 2019 is much lower than last year. Germany, Turkey and Venezuela are in recession as well, the report notes.
The Sino-US trade war has been one of the most important factors, with both countries slapping escalating tariffs on each other’s goods, sending the Chinese economy on a downward spiral. The IMF predicts the country’s GDP growth rate will be at 5.8% in 2020.
In India, the warning bells have been ringing for a while, with multiple agencies slashing GDP growth rate projections. The IMF slashed GDP growth rate projection to 6.1 from its earlier 7%. The World Bank too, in its South Asia Economic Focus, pegged the GDP growth rate projection at 6%. India’s GDP grew by 5 % in the April-June quarter, down from 5.8 % in the previous quarter, as per National Statistical Office (NSO) data.
Germany, which is an economy heavily reliant on exports, saw falling demand for capital goods globally, according to a recently released Ifo Institute report. The Ifo Institute’s Joint Economic Forecast for 2019 sees a downward revision from the 0.8 % GDP growth projection earlier this year to just 0.5 % now. The country is experiencing a manufacturing slump.
In fact, when it comes to manufacturing, earlier this year, the Purchasing Managers’ Index (PMI) for most key economies slipped below 50, a sign of contraction.
(Source: IHS Markit)
In the US, there was an inversion of the yield curve in August, sparking off fears that a recession was just around the corner. The inversion is seen as an indicator of recession – because every recession in US history has been preceded by an inversion. The yield curve is inverted when yields on short-term bonds are higher than those on long-term bonds — a sign that investors are fearful of the future. After months, the curve has normalized but expert opinion is divided on whether it means there are no recession fears.
Meanwhile, the Bloomberg Economics recession probability indicator predicts that there are over one in four chances of a recession in the next year. (3) Credit rating agency Fitch(4) has predicted that global GDP growth levels would drop to an eight-year low in 2020. Accordingly, global growth is forecast to drop to 2.6% this year from 3.2% in 2018. In 2020, growth is pegged at 2.5%.
So, how should an investor look at the recession?
In conclusion, when that recession comes or if it does, it is useful to remember that current market dips that cause panic and fear may look like a minor blip years later. Not losing sight of your personal goals and investing accordingly goes a long way. You could choose one of the mutual fund options, available on Finserv MARKETS, to ensure portfolio insights, free account set-up and customized advice based on your profile. Opening an account is effortless and speedy, so you can start investing now.
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