The 2019 recession: Why it’s coming.
Two years out is when I’m worried about,” said Dalio. “It’ll be more of a dollar crisis than a debt crisis, and I think it’ll be more of a political and social crisis.
-Ray Dalio September 2018
Two-thirds of business economists in the U.S. expect a recession to begin by 2020 with another ten percent see the next contraction starting in 2019 according to the National Association for Business Economics. The economists cited trade policies and rising interest rates. New macroeconomic developments suggest we are headed this way. Recently Apple announced a rare guidance cut to its earnings citing the slowdown in China’s Economy. It also cited that the “strong US dollar [created] foreign exchange headwinds.” The curve yield for the 3-5-year treasury bond inverted; the first time since the 08-09 financial crisis. In addition, recent developments such as the prolonged government shutdown have adversely affected the border economy. These developments will cause an economic retraction soon.
After Apple’s earnings revisions many analysts believe other companies will report lower earnings, attributable to a slow in emerging markets. China reported the lowest GDP growth since 1990 with annual growth rate of 6.6%. China is also lowering its growth projections for 2019 aiming for a 6% growth rate. This growth rate will prove exceptionally hard to meet because of the trade tensions between the United States and China. The slowdown in emerging markets isn’t only affecting China. The Chinese market will also continue to face downward pressures because of the prolonged trade war. Xi Jinping will probably diffuse the situation by promising to buy more American made goods to reduce the trade deficits without conceding any long-term reforms. In Turkey economic growth slowed to 5.2% growth year-over-year slightly less than its expected 5.3% growth rate. This growth is significantly slower to last year’s growth rate of 7.4% An emerging markets forex strategist said, “The Turkish economy is widely expected to lose even more momentum in the coming quarters as a result of significant lira depreciation,”
Interest Rate Hikes:
The United States corporate debt load is quite significant sitting at $9 trillion dollars. Increasing interest rates will put downward pressure on earnings and cost companies more to service their debt. Jerome Powell, the chairmen of the board, has stated recently that the fed has no “planned interest hikes.” His statements coupled with the good jobs report are the reason for the surge in equity prices. Jerome Powell also sees no reason for the economy to enter a contractionary period in the near future. However, he has said that the Fed is prepared to raise interest rates to meet the 2% inflation rate.
There are two main political points worth discussing both stemming from the current administration in the United States: trade: The trade wars with China and the government shutdown. If the trade wars with China become prolonged it will have a severe determinantal impact on global growth. However, these trade wars are largely ineffective China’s trade surplus with the U.S. hit a record high $323.32 billion a 17% increase YoY. Thus, if Trump’s aggressive trade policies are ineffective perhaps a rethinking of his approach without
The second point worth discussing the government shutdown actual economic impact is marginal to the psychological impact it has on equities. Economists estimate that each week the government remains shut down it costs the economy $1 billion to $2 billion dollars a week. These numbers are mere rounding errors in an economy that produces $20 trillion dollars in goods and services a year. However, a protracted government shutdown has never persisted. The data regarding a protracted government shutdown does not exist. Thus, it is difficult to predict how a protracted government shutdown will impact the American economy.
There are dissenting voices on the timeline of the next recession, but it is inevitable that the economic contraction occurs. While certain over politicized factors like the government shutdown may not have a macroeconomic effect, it may affect people’s perception of the U.S. economy pushing asset prices lower. However, economists are not worried of an economic contraction but rather a slowdown of the expansion the world has witnessed. In addition, Jerome Powell has stated that the Fed policy towards tightening rates is very flexible. These factors along with a slowdown in emerging markets suggest a recession is within the next two years.