It is September 15, 2008. Lehman Brothers have just collapsed, a shell of their former selves and their corpse an icon of the global recession. They said that it was the worst recession since the Great Depression.
One thing’s for sure: they haven’t seen the recession that’s going to happen in 2016 yet.
Recession. A word which is sure to send millennials and the elderly alike reeling in horror, especially given the cataclysmic events of 2008. It was the financial version of the apocalypse; with it being borderline masochistic to even look at one’s investment portfolio during the time. For this most recent global recession, most high-profile individuals within the world of finance pledged that it would never happen again, and that it would be left as a relic of the past. Unfortunately, that couldn’t be further from the truth. Europe has in fact worsened economically, not gotten better, and this, in an amalgamation with other factors including China worries and poor economic data, could be the straw that pushes the world over the edge into another meltdown. Financial markets have been uncharacteristically tumultuous in the past few months, with the S and P 500 already breaching its August lows and the Dow Jones Industrial Average tumbling into uncharted territory, below the support level of 16,000. Combine this with the fact that history shows that recessions normally happen after 8 years, and what you have is a lethal melting pot of factors that could send the globe haywire once again.
Although it has emerged recently as one of the world’s top superpowers, China’s faltering economy may be one of the catalysts for the impending 2016 recession. With the gargantuan growth in disposable income that the Chinese middle class have had over the past few years, it seems almost axiomatic that they would choose to invest it in real estate and the financial markets. Through the summer, we already saw the financial markets see a huge correction, and the real estate market is showing dangerous signs of popping as well. With the abundance of Chinese houses that no one lives them, there is a relative abundance of supply compared to demand, and in time, this bubble will pop and prices will come crashing back down. With China taking up a massive proportion of global GDP, when the Chinese bubble pops, it is very likely that this will cause a recession in the Asian country, which, in turn, will cause the same across the rest of the world. It goes without saying that this will have devastating consequences for both China and the world as a whole.
Despite the fact that near to no economists are willing to even offer their opinions on when a recession will occur, even a humble layman can see that the same negative signs are being exhibited as in 2008, and indeed, all of the other recessions. In the last quarter, the GDP of the US shrank, albeit by a small amount. Regardless of the amount by which it shrunk, this is eerily reminiscent of the signs that were exhibited before the 2008 recession, with US GDP growth contracting as well. The weakening demand for products has also resulted in profits for corporations slipping, which has led to declining share prices. The rounds of quantitative easing that the US’ Federal Reserve have implemented also have created a massive financial bubble in the US, especially in the stock market. This is the reason why when the Federal Reserve finally raised interest rates by 25 basis points, the financial markets were so rocked in the month after. In my humble opinion, this is only the beginning, as the bubble will pop further before we see the end of this bearish downturn. It’s a simple consequence of the Fed’s actions; now, they have to reap what they sowed.
Emerging markets could also be the major catalyst for a global economic slowdown. Over the past few years, emerging markets have been surging, and their export based economies have gone from strength to strength. However, now that net investment into emerging markets is slipping, their economic growth is slowing down, and some countries are already in a recession at the start of 2016. Indeed, when you factorise in the fact that barely any of the emerging countries have consumer driven economies, you realise that there is absolutely no insurance for these countries against a global economic downturn. What this means is that when the rest of the world tanks, these countries will tank, and harder, because no one will be willing to buy the goods which they produce, hence damaging exports, and contracting their economies. This will lead to a vicious cycle which these countries’ economies may not be able to recover from for a very long time.
The problem of student loans, especially in the UK and USA, could also be a major impediment to global growth. The heavy impact that a series of defaults would have on these countries’ economies notwithstanding, due to the burden of student loans, these students cannot even invest in the goods and services which they would otherwise. Considering that young people make up a great deal of many sectors’ total revenue, their reduction in spending will come as a massive blow. This could potentially cause these companies to cut costs by rendering some redundant, meaning that those people would not be able to invest in goods and services, leading to severe economic downturns. The other problem that the student loans issue may cause is for people to pull their (perhaps inherited) money out of the real estate and stock market, for example, potentially being the catalyst for both bubbles to burst.
However, despite the fact that recessions are not out of the ordinary and are simply parts of the global macroeconomic cycle, the fact that central banks have little room to manoeuvre in terms of interest rates this time will also help to accentuate the effects of the collapse. In 2008, interest rates were comparatively very high, with the Federal Reserve’s rates even being above 5% in 2007. Now, however, a 25 basis point hike to a 0.25% interest rate seems out of the ordinary, with near zero interest rates having become the norm. As a result of this, the central banks can carry out barely any expansionary monetary policy, meaning that they will find it hard to find a way out of this recession. In 2008, they at least had the interest rate to play with. What’s going to save them in 2016?
A recession is coming. And I, for one, wouldn’t expect my stocks to start delivering a positive return any time soon.
Disclaimer: These are simply my thoughts and do not guarantee in any way that a recession will occur in 2016.