Concerns of a global recession appear to be on the rise, but economists say it may take an additional slew of bad news — or maybe a volley of bad tweets — before output and consumer sentiment fall off a cliff.
Economic data over the past few weeks has added to the anxiety. On Friday alone it was reported that the British economy contracted in the second quarter, that the International Energy Agency had noted that global oil demand growth is slowing at a rate not seen since the global financial crisis, and that Canada, despite some strong wage growth, unexpectedly shed 24,200 jobs last month.
Then there is the United States, whose president recently threatened China with a fresh batch of tariffs to add to the approximately US$250 billion of Chinese goods the U.S. had already hit with 25-per-cent levies.
“Against this backdrop, we are concerned that global recession risks are now rising materially,” economists from U.S. investment bank Morgan Stanley wrote this week.
The globally economy has been expanding for about a decade, helping fuel talk of a cooling-off period. The International Monetary Fund recently lowered its forecast for global growth, by 0.1 percentage point, to 3.2 per cent for 2019; 2018 saw growth of a more robust 3.6 per cent.
Central banks have seen uncertainty and begun lowering interest rates. Over the past 10 days, the U.S. Federal Reserve has taken an “insurance” rate cut to hedge against a downturn, while the central banks of India, New Zealand and Thailand followed suit with their own surprise cuts.
The psyche of businesses and investors looks to have gotten twitchier as well. The S&P 500 and Toronto Stock Exchange indices are down more than 1.8 per cent and around one per cent, respectively, over the past month.
“Both investor and business sentiment, I think, is a bit more fragile at this point,” Bank of Montreal chief economist Doug Porter told the Financial Post. “There’s still quite a bit of caution out there among Canadian businesses.”
Then there are other, harder-to-understand, warning signs. For instance, TD Securities, an arm of Toronto-Dominion Bank, noted this week that their model based on U.S. Treasury bonds, “estimates a 55% chance of a recession within 12 months, which is the highest level since 2007.”
The J.P. Morgan Global Manufacturing Purchasing Managers Index saw manufacturing production worldwide decline for the second month running in July, reflecting a further reduction in new order intakes.
“International trade volumes contracted for the eleventh month in a row and to the greatest extent since October 2012,” the survey said, noting new export business decreased in Canada, China, the U.S., the Euro area, Japan, Taiwan, South Korea, the U.K., Russia and Brazil.
There’s still quite a bit of caution out there among Canadian businesses
Doug Porter, chief economist, Bank of Montreal
What could finally plunge the global and Canadian economies into a recession remains to be seen, but as Canada heads towards an election this fall, evidence is mounting that its economic future may not entirely be in its own hands.
The leading catalyst for any economic downturn will likely be trade machinations, particularly from China or the United States.
“If it did happen, it would have to be a full-on, policy-induced error, led by trade policy, in my opinion,” said Derek Holt, an economist at Bank of Nova Scotia. “I’m not convinced of the other arguments in favour of a derailment.”
In their report earlier this week, the Morgan Stanley economists said that if the U.S. were to put 25-per-cent tariffs on all imports from China for four to six months, and if China were to respond in kind, “we believe we would see the global economy entering recession in three quarters.”
The Bank of Canada has been thinking about this as well. Just last month, the bank’s senior deputy governor, Carolyn Wilkins, said in a speech that the trade picture “continues to be the biggest wild card for our outlook.”
In its accompanying monetary policy report, the central bank also envisioned two “extreme scenarios,” which laid out two very different visions of the economy. One would be wracked by even greater trade tensions and tariffs, and the other would see uncertainty about trade finally, mercifully, fading away.
The “upside” scenario, as the bank described it, would see the global economy “broadly” return to “pre-2017 trade arrangements.” Disputes between economies would be patched up, and recent tariffs would be wiped out, among other things.
A long shot, sure, but in the upside scenario, the level of global gross domestic product as of the end of 2021 would be around one per cent higher — and Canadian GDP about two per cent higher — than in the bank’s base-case projection, which still included the effects of recent tariff hikes and uncertainty.
While the “R” word wasn’t used, the downside projection was for a level of global GDP that would be approximately three per cent lower than the base-case by the end of 2021, with Canadian GDP about six per cent lower.
So, even if all this came to pass, “the positive impacts on Canadian and global output in the upside scenario are not as large as the negative impacts in the downside scenario.”
In the worse-case scenario, much of the decline would be chalked up to weaker exports and investment by businesses, which would see their confidence dealt a blow and costs of importing materials rise, leading them to contemplate relocating their production to the U.S.
Meanwhile, consumption would be “weaker,” the report said, as employment would fall and the Canadian dollar would depreciate in value.
At any rate, trade-related developments seem to be skewing more towards the downside.
Soon after the Bank of Canada released the report, U.S. President Donald Trump fired off a tweet: “When you are the big ‘piggy bank’ that other countries have been ripping off for years … Tariffs are a great negotiating tool…”
The trade troubles refuse to let up, as Trump more recently vowed to slap an additional 10 per cent tariff on around $300 billion in other Chinese imports on Sept. 1.
“The more we think about it, the more we realize that this trade dispute is going to be with us for a long time,” wrote Benjamin Tal, an economist at The Canadian Imperial Bank of Commerce. “The fog is not going to clear, because Trump doesn’t want it to clear.”
Canada is no island either. A recession south of the border could heighten the risks of being sucked into negative-growth territory.
“I know China is still a small proportion of our total trade, but it’s where all of the growth has been happening in recent years,” said Pedro Antunes, the chief economist at the Conference Board of Canada. “I think if we were to see our two biggest export markets getting hit, this would have implications for trade.”
What’s more, the psychology of consumers may still be little affected so far amid the trade troubles. If they were to start to feel a bit more pain, sentiment could shift.
“As you affect … purchasing power in the largest consumer economies in the world, then you start to have these kind of more important repercussions, reducing demand and having more broad global implications on trade,” Antunes said. “But we haven’t really seen a lot on the inflation front.”
In times of trouble, investors have been known to look at safe haven gold, recently sending the yellow metal too a six-year high of US$1,500 per ounce. Even Bitcoin has climbed 18 per cent this month.
There are other, more Canadian-centric things to worry about, such as highly-indebted consumers. There is also a closely-watched housing market that government and regulators appear to have cooled with various policies over the past two years, such as a “stress test” for mortgages.
The fog is not going to clear, because Trump doesn’t want it to clear
Benjamin Tal, economist at the Canadian Imperial Bank of Commerce
“A sharp reversal in (Canadian) housing market prices, particularly if accompanied by a rise in unemployment and a collapse in people’s consumption, could spark additional risks to financial stability and growth,” noted International Monetary Fund staff this past week.
Still, if the Canadian and global economies were to fall into even more dire straits, central banks and governments could step in and inject some stimulus, such as by slashing interest rates or pumping up infrastructure spending.
Even then, it may not be enough.
“Global central banks, in particular the (U.S. Federal Reserve and European Central Bank), will provide additional monetary policy support,” the Morgan Stanley economists said. “But these measures, while helpful in containing downside risks, will not be enough to drive a recovery until trade policy uncertainty dissipates.”
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