Macro Macchiato: Increasing Signs of Recession?
The global economy has grown slowly since the financial crash of 2008, but it has grown consistently to recover lost production. Even in the UK, the government was recently pleased to announce that workers’ average wages have now recovered to their 2008 levels after a decade of austerity. Applause from the housing estates of manufacturing towns was muted. Stock markets around the world have been hitting high notes, fattening the pensions of workers and building the bonuses of investment managers. Even dry and wet bulk shipping enjoyed some profits in 2018 and 2019. But there are signs of weakness even before we think about Covid-19, as the WHO has baptised the coronavirus.
Starting in China, the automobile market offers a reliable indicator of consumer activity and in January car sales were down again. GM, the US manufacturer which relies on China for two-fifths of its sales, reported that January new car sales were down 40 per cent year on year. There may be some Lunar New Year seasonal adjustment in that number, but most of the month’s sales would have happened before the public became aware of Covid-19. Add in Covid-19 and auto sales plummeted 92% in the first 16 days of February to only 4,909 sales, according to the China Passenger Car Association. Their analysts predict sales will fall 10% in the first half of 2020 and 5% for the full year. In any event, it looks like China’s workers aren’t back to work in sufficient numbers to need new cars. Data crunchers Exante Data show that intra-city travel in China’s 50 biggest cities in the week to 22 Feb was down 47% year on year and down 55% compared to 2020 before Lunar New Year.
Japan meanwhile has published some rotten economic data in the last week with the economy contracting at an annual rate of 6.3% in December – that’s before accounting for Covid-19. Analysts had expected a 3.7% contraction due to an increase in consumer sales taxes, but this was much worse than even the most pessimistic were expecting. Then, the virus: the Nikkei Business Review says that 87% of Japanese companies with operations in China have suspended those operations due to Covid-19 and of course Japan has its own outbreak to deal with. Has Abenomics run out of steam? A recession in the world’s third largest economy cannot remain confined to the world’s third largest economy.
Further south, Singapore raised its Q4 2020 GDP estimate from 0.8% growth to 1.0% growth but has lowered its own forecast range for 2020 GDP growth to -0.5% to +1.5%. Asian stock markets are taking a battering this week as Covid-19 fear grips investors, driving them to US bonds and gold.
The US is not universally benefitting from this movement of funds. Wealthier Americans who have stock market investments and full-time employment are enjoying rising wages and prosperity. But the bottom 90% of the US population by income has a negative savings rate, while credit card delinquency rates have been rising from their 2015 low of 2.0% to around 2.5% today, while delinquency rates at 4,500 smaller banks have ballooned to 7.0%, higher than they were in the financial crisis which was, as you remember, a consequence of over-exuberant sub-prime lending. The news from Wall Street is that investors have a heads-in-the-sand approach of “Nothing matters.” If Covid-19 is contained within the present economic quarter, then they may be justified in their nihilism, but underlying sub-prime weakness in the US economy will continue to build as its structural inequality remains unreformed. Remember, there have been only 10 years of wage growth in the last 40 years in the US. Commentators discuss the Great Affordability Crisis and increasing indebtedness is becoming a campaign-trail issue. A wider Covid-19 pandemic could catalyse another credit default led recession in the US. The data suggest that event is coming anyway, we just can’t yet say when.
The EU published its Winter 2020 economic forecast on 13 February, having done its analysis before any Covid-19 cases were confirmed in Europe. GDP growth of 1.2% was predicted for 2020 and 2021, down from 1.5% in 2019. The bloc’s economists nonetheless took their chance to warn that “Member States should use this weather window to pursue structural reforms to boost growth and productivity. Countries with high public debt should also shore up their defences by pursuing prudent fiscal policies.” Paolo Gentolini, European Commissioner for the Economy, said that “it is too soon to evaluate the extent of [Covid-19]’s negative economic impact.” Since then, the EU has announced €230 Mn of spending to fight Covid-19. Money markets are pricing in a 50% chance of an ECB rate cut to stave off recession given the slowdown in Asia, a key export market for Germany, the Eurozone’s core exporter.
THE TAKE AWAY
There are weaknesses in the global economic system, not least the continuing reliance on state, corporate and consumer debt to fund growth in consumption. The increasing cost of cross-border trade is weighing down on growth, and we ought not to discount the growing environmental cost of consumption and global warming. Perhaps the global economy could withstand these headwinds but throw Covid-19 into the mix along with the uncertainty and investor fear it generates and the volatility of the economic system increases, raising the chances of a slip into recession. If global shipping markets are a bellwether of the global economy, then a recession looks like a dead-cert. The prevailing wisdom is that we should buy the dip…perhaps that’s good advice for ship operators, especially looking at prevailing second-hand prices for vessel which could yet offer more value to buyers. In the meantime, as at any moment when the chances of a recession are rising, it’s a good idea to keep a decent supply of hard cash around.