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By HaleStewart November 11, 2014 1:55 pm
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Global Recession Calls Are Not Far-Fetched

From Bloomberg:

The Jerome Levy Forecasting Center, based in Mount Kisco, New York, and run by Jerome’s grandson David, is again more worried than its peers. Its half-dozen analysts attach a 65 percent probability of a worldwide recession forcing a contraction in the U.S. by the end of next year.

As the blog Calculated Risk points out , the current economic environment makes recession calls difficult due to the inherently slow nature of the current economic environment.  However, given the amount of press this story is getting, let’s drill down into some of the details.

     First, note the call is for a worldwide recession.  Given the current economic environment in several regions, this is not as far-fetched as it sounds.  Let’s start by noting the EU is either already in a recession or just above 0% growth.  Unemployment is incredibly high, deflation is a very real possibility (if not already in place), industrial production remains far below its pre-recession levels and retail sales are weak.  Considering this is one of the world’s largest trading blocks, the preceding economic numbers are not encouraging.

     But the bad news extends across the globe to Japan where Abenomics is running into serious headwinds.  2Q14 GDP contracted over 7% and the leading index from the Conference Board dropped from March-July and was just barely positive (.1 and .3 respectively) in its last two readings.  The year over year numbers have been sharply negative for the last five readings.  Industrial production has been weak and the hoped for pace of increasing inflation has been stalling over the last few months.  The BOJ recently increased its stimulus measures in an effort to get the plan back on track.  And recent news stories are reporting that Prime Minister Abe is thinking about calling a snap election to obtain an electoral mandate allowing him to put off another tax hike. 

     And three of the BRICs are also facing difficulties.  The Russian ruble has dropped sharply, growth is projected to be near 0% next year and an inflationary spike (the last reading was over 9%) has forced the Russian central bank to raise interest rates 150 basis points to 9.5%.  Several recent government auctions have been canceled because the market wanted at least 10% for compensation.  Brazil is already in a technical recession (two quarters of negative growth) with inflation at 6.5% and interest rates at 11.25%.  The real is also not in great shape.  And while on the surface China is doing well, news stories highlighting the very high domestic debt levels and weakening real estate market are becoming more and more common.

     Also consider the declining position of commodities, caused in part by a lack of overall demand.  Declining Chinese purchases are also bleeding through to other countries in the “south-south” trade as Australia and South America try to rebalance their respective economies from major exporters to a more balanced composition.

     And finally, consider these charts of the OECD leading indicators from their latest report:

The overall OECD (upper left, which includes 33 countries) is positive, but certainly not in strong shape.  And when we include the other big 6 economies (Brazil, China, India, Indonesia, Russia, South Africa) the number turns negative, confirming the idea of a world-wide recession call.  The major 7 (Canada, France, Germany, Italy, Japan, United Kingdom, and United States) are in OK shape, but their LEI is moving lower.  And the major five in Asia are already looking at a contraction.

     If only one country were reporting bad news, the prediction wouldn’t carry much weight.  But the breadth of the problems we’re seeing in the global economic front right at lend credence to the prediction.  There are four potential economies that might prevent this from happening: Australia, Canada, the US and the UK.  But they have a lot of counter-balancing problems to deal with.    

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

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