IS A GLOBAL RECESSION IN THE OFFING?

This post is not meant to alarm you, although to be honest I am a bit alarmed myself.

It seems that a global recession is in the making. This is according to Tiz Gambacorta, an investor, serial entrepreneur, and a reputable digital marketer. I subscribe to his weekly newsletters, and last week’s newsletter was discussing a looming global financial recession.

Tiz is not the only one who thinks like this. Many economists, financial market analysts, as well as big-time investors have been saying the same thing for the last couple of years, but their predictions have not come to pass ‘convincingly’.

Unfortunately, that does not mean that it is not coming. And the way Tiz put it on his website actually had me freaking out.

Here in Kenya, the perception is that the economy is always bad, so most people would not pay heed to alerts over a global recession. Well, maybe until it is about too late, and there is practically nothing we can do (except politicize the matter).

Whether these predictions become actual state of affairs is a matter of time. What I do know is that it is going to hit our country hard, mainly because of the perilous position we have placed our economy in.

For those who do not know, we are in the throes of a Chinese debt trap and IMF has backed us into a corner in regards to increasing the tax on petroleum and other basic goods. The cost of living is absurdly high at the moment, and our country’s economic activity is sure to take a hit as a result.

Let us not forget that just last week, we lost access to the IMF Standby Credit Facility, exposing us to a myriad of risks occasioned by external financial shocks. Our economy could collapse because we do not have protection from global economic shocks.

Yes, we are in trouble, and we are about to be in even graver danger if what Tiz and his fellow analysts are predicting about a looming global financial recession comes true.

There is reason to fear. The signs are there, and they are pretty convincing.

Let us start with an obvious one – the contraction of activity in major markets across the world.

Most markets have seen a reduction in activity for the better part of the year. We are talking about the Asian markets, the European markets, the Latin American markets, as well as the African emerging markets.

Most alarming are the major Chinese markets performing extremely poor this year. Granted, the slipping has a lot to do with US-China trade wars that have continued to take centre stage throughout 2018. However, the poor performance of the Chinese markets could point to a major decline in global economic activity away from its catastrophic side-shows with America.

China’s year to date market indices have continued to drop into double digits. She is currently the world’s largest producer, and its markets’ contraction means that most countries have slowed down their importing activity.

The US could also tip towards recession if it continues to escalate this trade war with China. Most of her imports come from China, and the additional tariffs on Chinese imports could crumble American businesses (it is a strong hypothetical).

The year to date market indices of the European markets is not fairing as well either. Germany is Europe’s main manufacturing powerhouse, and its markets continue to post poor results. This demonstrates that there is a reduction in activity in Europe as well.

The screenshot below shows the major markets’ indices across Europe, Asia, and America. If you look at most of the YTDs across the markets, you will see that they are red in colour, indicating a decline in performance. The Chinese markets are especially doing bad because their YTD performances have slipped by double digits.

According to Tiz, and other like-minded market analysts, the problem began in the Latin American countries, and owing to the contagion effect, the contraction of economic activity has continued to spread throughout the world.

We should also be very concerned at the rate at which global currencies are weakening, some even into double digits. This is a snapshot of some of the worst performing global currencies at the moment based on their year to date percentage change against the US dollar. Majority of the globe’s currencies are sliding in value, and not just the emerging and poor markets captured in the snapshot.

Perhaps one of the biggest tell-tale signs of a looming global recession is an inverting global yield curve. According to several financial publications such as this one, the average global yield curve is inverting, and history dictates that when the yield curve inverts, a recession is in the making.

When a country’s yield curve inverts it means that investors expect higher short term returns on bonds rather than the norm, which is higher returns on long term investments in the bonds.

Usually, long term bonds attract higher interest rates than the short term ones. However, the opposite occurs when investors perceive that short term investments are riskier than long term investments.

The flight to dollar is another clear indication that we are facing turbulent economic times. This characteristic has been a consistent early warning sign of a recession.

Investors, businesses, and other governments see the US dollar and her debt as a safe haven when the global economy is going south. Hence, there is a higher demand for US currency and debt as entities around the world try to brace themselves for an economic downturn mainly by stocking up on dollar reserves.

This flight to dollar is probably the reason the US dollar is still going strong, and its individual yield curve has not inverted yet.

So there you have it. An inverting global yield curve, weakening of currencies’ performances, declining performances in major markets, as well as the flight to dollar are some of the major signals that a global recession is in the offing.

Kenyans, brace yourselves! It is going to be a bumpy economic ride.

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