Zoilo “Bingo” P. Dejaresco III l June 30, 2022 l Manila Bulletin
THE USA’S GDP GROWTH Is expected to slacken to a slow 1 percent (2021) and 1.4 percent (2022), China’s GDP forecast is down from 5.1 percent to 3.2 percent, and Europe is greatly affected by the war between neighbors Russia and Ukraine.
Consumer confidence indices in America have been at their lowest in 40 years with inflation at 8.6 percent (the highest in 4 decades) and the Fed was forced to respond with successive interest rate increases; so did a number of countries including China.
While the rest of the world seemed way past the worst of Covid, China (the second-largest economy) today still has massive lockdowns causing further supply chain disruptions. America is facing a bond crisis, stocks have severely been decimated since January 2022 and showing an “inverted yield curve” signifying that investors are scared of the immediate future.
In America, mortgage rates are up, and housing and car demand are down (partly due to lack of manufacturing chips which is a supply chain disruption offshoot)- two of the major indicators of economic health since American GDP is 2/3 driven by Consumer spending.
If Germany pulls the plug off Russian oil pipelines, all three major continents will be in real bearish territory. Economists in the USA recently surveyed disclosed that 44% of them were in agreement that a recession is inevitable. And as they say, when America sneezes, the rest of the world catches colds.
An independent study of recessions in the last 100 years shows them lasting an average of 14 months except in major negative events like World War II, the 1930 Depression and the 1970s hyperinflation. But isn’t a 2-year pandemic (Covid-19) followed by the Russia-Ukraine war causing food and energy shortages both “major” proportionate disasters? How long an economic drought could this one be?
Two schools of thought postulate why a global market crash- or at least punishing recession – is probably already underway globally.
One such theory comes from renowned economic forecaster Ray Dalio who points to three danger signs that point to a global slowdown. (One)( is the debt-financed growth with the accumulation of enormous debt and monetized by printing more money. Without high productivity, this is highly inflationary. (Two), in the face of wealth disparity among people and nations, is the growing extreme populism of both the Right and Left -leading to inevitable conflicts since both sides are not in the mood for compromise. (Three), is the “Great Power Conflict”.
Post-1945- Pax Americana era, says Dalio, saw America dominate the world in almost all aspects- resulting in general global peace and order. Now, that dominance is challenged, economically and militarily by a new superpower in China shrinking the “power gap” and lighting the fuse of probable intense conflict.
One other philosophy points to the fact that since the 1980s, the USA has had a total of 30 recessions- events that result in siphoning the “excesses of the economy”.
Theory Two identifies three factors that lead to recession: (a) an overheated economy (b) the bursting of asset bubbles and (c) the “black swan” events.
Unemployment spins off from supply disruption which results in overheated demand (a) causing inflation or rising prices. As inflation roars upwards way above interest rates, people hedge and stop spending -exacerbating the downturn. “Above average inflation paired with below-average economic growth”, according to the World Bank, results in stagflation – which punishes the less wealthy nations especially. (B) Asset bubbles bursting examples, on the other hand, are (1) 2001 dot.com and (2) housing market crash. (C) “Black Swan” candidates, in the meantime, are political and environmental in nature such as today’s Covid 19 and the Russia-Ukraine imbroglio, respectively. Current empirical evidence and various global economic theories we read tend to lend to the definite personal discomfort that, indeed, the recession could already be really at hand.
The only question left will be how deep and how long it will last?
*** (Bingo Dejaresco, a former banker, is a financial consultant and media practitioner. He is a Life and Media member of Finex. His view here, however, are personal and do not necessarily reflect those of Finex. Dejarescobingo@yahoo.com)