The current scenario of global economy looks quite grim. Emerging markets’ currencies are in a free-fall. The last global recession was almost a decade ago  and market experts are anticipating the next to begin in another year or two.

Forecasting a recession is a difficult task just like trying to accurately pin where the market would end by certain time.. Economists are good at explaining what happened after an event has occurred  but not in predicting future with precision any better than the weatherman or by a coin-toss.

Many experts are seeing storm clouds in the horizon of U.S economy which otherwise looks clear and sunny. By different measures, U.S. economy looks in great shape since great recession of 2007-2009. Still, strong economic indicators do not guarantee a sustained future growth. For an example, the retail sales are at record high, so do the consumer confidence index; however, it was also at high just before two previous recessions.

In the U.S., unemployment ratio hit 18 years low (3.8%) in May, 2018. The average wage growth is expected to reach 3% by the end of the year along with robust economic growth. In spite of all that a major section of economists are foreseeing a slump in late 2019 or in early 2020.

Rationale behind a market downturn

The reason behind this apprehension is things seem to be going so well in U.S. economy. The later stage of an economic cycle is most vulnerable to popping of a market bubble.

In a recent Forbes article, it was clearly called out that a dangerous corporate bubble is under formation in the corporate bond market. This bubble is pushing the stock market in the new highs. It is putting U.S. stock market and economy under risk.

According to author the root cause of this bubble is low rate of interest in almost all sectors. This has been the trend of Federal Reserve’s since early 1980s. It got amplified after great recession of 2007-2009 to infuse liquidity. In order to rejuvenate global market, fed reserves pumped liquidity in the global financial system and market through several iterations of quantitative easing programs.

The quantitative easing created new money worth $3.5 trillion and caused stocks and bond to surge. After the great recession, the ultra-low corporate bond yields persuaded U.S. public corporations to borrow heavily. Now, the corporate debt stands at over 2.8 trillion which is 40% more than in 2008.

The U.S. corporate outstanding debt  has increased over 45% of the country’s GDP. The situation is worse than the dotcom bubble and U.S. housing and credit bubble.

Other Cues Behind Possible Downturn

  • Political ineffectiveness is putting great impact on the global economy. Politics of populism (both left and right wing) is holding back governments in taking bold steps to avert economic downturn.
  • Dependence on international trade is making companies vulnerable to cross-border issues or shock of bottlenecks. Companies are more dependent on overseas market conditions instead of domestic market. Shock to the global supply chain even affects domestic sales.
  • U.S. economy is short of ammunition to fight back due to high corporate debt and budget deficit.
  • Higher energy prices could be another contribution toward the anticipated global crisis. Reduced oil production of OPEC countries and Russia is taking toll on rising energy demand of the world.
  • Tariff war between U.S. and China has far and wide unintended consequences on the  world economy, especially the emerging markets. Experts fear that trade war would near a downturn of U.S. economy unless they negotiate and arrive at a common ground soon.

The Opportunity You can Grab from Emerging Markets during the Era of U.S – China Trade War

Fragile Emerging Market Economy

The emerging markets are going through a tough time. The combined blow of tariff war, rising dollar and crude oil price is weakening economy of different emerging markets.

After Turkey, Indonesia, Argentina and peripheral Europe, markets analysts are closely watching rest of the emerging markets to identify the next economy to go down. . These countries that have experienced economic turmoil are reeling under massive current account deficit and rising external (Dollar denominated) debt.

India is also witnessing all time low in the USD exchange rate. At this point India is growing sustainably due to tough steps taken in a proactive manner. Demonetization and measures to broaden the tax-base are all steps in the right direction. Indian banks now have huge buffer to combat any systemic shocks otherwise the situation could have been similar to Turkey, Indonesia or Brazil.

The next country to fall probably is South Africa. The local currency Rand has already lost more than 25% against USD since March of this year.

Celebrated economist Raghuram Rajan says that U.S. and China must sit together to negotiate trade terms. Otherwise the rippling effect of tariff war would play vital role in nearing next global recession.

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