How Much Are We Slowing Down?
by Charles Cheng, CFA
After a decade of gains from global equity markets without a major economic crisis, investors are justifiably concerned about whether the world is due for another slowdown. We take a look at some of the signs of an economic slowdown to try to understand how much closer we are to another downturn than in recent years.
Around the world, there are signs of slowing growth to various degrees. In the US, the New York Federal Reserve’s recession probability model made headlines when it reached nearly 33% in July, crossing the 30% mark which has preceded every recession since 1960. Most recently, this was around the highest level the indicator reached before the 1991 US recession, though it crossed the 40% threshold in both the subsequent dot com bust and global financial crisis. The cause was the inversion of the Treasury Spread between the yields of the 10-year Treasury Note and the 3-month Treasury Bill, which we previously discussed in March. Lower Treasury yields in longer maturities are a sign of diminished expectations of future growth. However, other economic indicators, such as job growth and retail sales remain strong.
Source: NY Fed
Asia is feeling the effects of the trade war against China initiated by the US, with China’s Q2 GDP growth falling to 6.2%, the lowest rate in 27 years. For the first six months of 2019, China’s imports and exports both fell year over year. Diminished global trade spilled over to other countries in Asia as both India and Indonesia reported drops in exports of around 9% in June. And Europe perhaps has the most to be concerned about, with growth for the Eurozone forecast to be around 1.4% and for the UK to be around 1.2% for 2019. PMI manufacturing data for these regions have already fallen well below 50, into contractionary levels.
To be sure, it’s still too early to say whether the world will tip into recession. There are still steps that policymakers can take to delay any eventual downturn, such as cutting interest rates and pushing fiscal stimulus. One thing to consider in advance though is that this time around, governments have even less ammunition to deal with a global recession, with government deficits rising and interest rates low. As investors, we also would like to be extremely sure that a downturn is imminent or in progress before we would consider reducing our investment exposure in any significant way. For now, it would be prudent to keep a close eye on any further deterioration on economic conditions while keeping your investment strategy flexible enough to deal with a wide range of potential outcomes.
Mr. Cheng is a managing partner at a Hong Kong based independent private investment office. This article reflects his personal views and not his firm’s and should not be viewed as an investment recommendation.