5 global recession signs you should know
Inflation, high interest rates, poor market sentiment… the financial markets are flashing warning signs that the global economy is headed for disaster.
It’s no longer a case of whether a recession is on the card but when it will occur.
The past 10 months has seen soaring inflation and high interest rates curbing economic growth. Coupled with an ongoing war in Eastern Europe causing the EU to face an energy crisis, and we have the perfect storm for diminished markets.
Today we look at important trends that point towards a global recession.
High inflation has seen the Dollar soaring to record highs, resulting it high prices of goods and services. To curb inflation, the US Federal Reserve is continuing with its most aggressive monetary tightening policy in decades. It’s not just the Fed. Globally, many central banks have implemented rate hikes, even if it means triggering a recession at the expense of consumers and businesses.
Research firm Ned Davis reports that there’s a 98% chance of a global recession. The company has previous global probability reading has been this high in 2008 and 2020.
Five key trends pointing towards a recession:
1 Rampant inflation
The 2020 pandemic saw global government borrowing huge sums of money in the form of economic stimulation packages. This proved a prudent solution, and the world was plunged into chaos. Unfortunately, markets are cyclical and in 2022, after years of steady currencies rates, inflation is sending prices of key staples soaring. Much of this can be blamed on the US dollar.
It’s important to note that the US dollar plays a major role in the global economy and international finance. In 2022, the Greenback is the strongest it’s been in decades.
The dollar is trinationally a safe haven for Forex traders. In a tumultuous market however — Russia’s war in Ukraine, traders and investors have even more incentive to buy dollars in the form of US government bonds.
A strong dollar is great for American consumers abroad but it creates major problems for everyone else. Many currencies such as UK pound, the Euro and Japan’s yen have crashed. That makes it more expensive for those countries to import essential goods such as food and fuel, usually tied to the US dollar.
Fred Razak, CMTrading’s Senior Trading Specialist, said: “It’s not that we’re headed for a recession, we’re in a recession already. Looking at the data you can see we’ve had two negative quarters. The stock market also reveals markets are negative.
“Usually when the US markets go down, the dollar goes up – it’s an inverse relationship. Inflation is a really serious problem, and it’s also tied to rising interest rates. As inflation gets worse and worse, they’re increasing the interest rates. This is also increasing the value of the dollar because you have less dollars in circulation. It costs you more money to borrow money, so investors and consumers will be less inclined to borrow money. This means there will be less money in circulation; lower supply means increase demand and the value goes up. It’s a very simple equation that’s unfortunately a double-edged sword.”
2 Interest rates soar
In response to rising inflation, central banks have increased interest rates higher and faster to boost the value of their own currencies.
Interest rates have risen at a historic pace in 2022, pushing mortgage rates and reducing the ability for any business growth. Consumers are dealing with a one-two punch of high borrowing rates and high prices. In 2021, global consumer spending soared especially in the eCommerce sector, which powered the economy and created growth despite the pandemic.
Since then, governmental aid has ended, inflation is at all time high and prices are rising at their fastest rate in 40 years. All this serves to make consumers more cautious to spend their funds, stalling economic growth. The No. 1 driver of US, the world economy, is shopping and consumer sentiment is at an all time low.
Razak said: “The dollar is being devalued so the Fed needs to pump it up. On the way to pump it up they’re making it more expensive. The way we make dollar more expensive is we charge more money to borrow it. Once we charge more money to borrow it, then it becomes more expensive and that’s exactly what we’re seeing right now. It’s prohibitively expensive to borrow US Dollars and this is turning away investors.”
3 Stalling economies
Globally many economies are slashing growth outlooks for 2023. The World Trade Organization lowered its global trade forecast for 2023. WTO economists said they still anticipate global economic growth to rise by 2.8% in 2022 but reduced their expectations for 2023; GDP growth is now expected to be just 2.3%, down from the previous forecast of 3.2%.
The International Monetary Fund forecasts growth at 3.2% in 2022 and 2.9% in 2023.
Razak said: “So there are number of stalling economies around the world, some more severe than others. I mean, we have a situation in Turkey where there’s hyperinflation. We have a situation in South Africa which is really very severe and its hurting economic growth.
“Several African countries are struggling in the aftermath of the pandemic as stimulus funds are depleted around the world. It’s catch-up time for the rest of the market. It was nice that we had this rally throughout the boom two years. Unfortunately, when you’re playing musical chairs, someone is left without a chair. In this case it’s consumers.”
4 War and soaring prices collide
Nowhere is the collision of economic, financial, and political disaster more painfully visible than in Europe. Earlier in February 2022, Russia began its invasion of Ukraine, sending oil prices to record highs. Since then Russia, the world’s major supplier of natural gas throughout the EU, has reduced its gas supply to the region.
As the West cut off imports of Russian natural gas and oil, energy prices have skyrocketed. The EU is facing an energy crisis as the northern hemisphere heads into winter. Supplies have dwindled and there are concerns about high costs and consumers unable to heat their homes during winter.
5 Bear market
The stock market has seen back-to-back poor quarters. The final quarter of 2022 will be critical for investors as it could either reveal hope for better profits or recession in the market.
Razak said: “I’d be much more focused on what companies are doing quarter to quarter. Seeing what innovative ways they’re using to stay ahead of the curve. Every, every boom is followed by a bust and every bust is followed by a consolidation time. The consolidation time is where the markets refine themselves and then they bounce back. This is what we’re looking at right now. We aren’t currently in this situation, but this is does. This does not mean that we’re not going to get out of it. It just means, you know, the question is, is how long is this recession going to take?”
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