Even if you don’t pay close attention to the stock market, Wednesday’s news may have caught your attention.
The main stock indexes in Canada and the U.S. both plummeted in their worst day of the year, and economic analysts are worried that a global recession could be around the corner.
There isn’t just one reason to worry. Several economic indicators from around the world have been linked to the international drop and the possibility of an extended financial decline.
A TELLTALE WARNING SIGN
Since 1957, every recession has begun after what’s called a “yield curve inversion.” That’s when the payout for 10-year bonds suddenly slips below the payout for two-year bonds.
This scenario is essentially the opposite of what happens in a healthy economy. Long-term bonds typically lead to higher yields than short-term bonds because investors are locking up their money for longer and expect more growth over a longer time period.
Basically, a yield-curve inversion indicates that investors are so nervous about the economy’s immediate future that they’d rather put their money into long-term investments.
“We are seeing investors really looking for safety in the long-term investments. They’re lending to governments at very, very cheap rates, and they’re much, much less confident about what will happen over that time period,” Karl Schamotta, chief market strategist for Cambridge Global Payments, told CTV News Channel.
This phenomenon has happened before the last seven recessions. Only twice -- in 1966 and 1998 -- has there been no recession after a yield curve inversion.
The last time a yield curve inversion happened was in August 2006, nearly a year and a half before the Great Recession in 2008.
GERMAN ECONOMY SHRINKS
The yield curve inversion came the very same day as deeply concerning news from Germany. Europe’s biggest economy shrank in the second quarter by 0.1 per cent, another indicator of a possible recession.
The economic decline has been largely credited to a slump in exports to China, which has itself has been suffering its own economic slowdown.
CHINA’S 17-YEAR LOW
In China, the industrial output growth slowed to its lowest point since 2002. Consumer spending also lagged.
To make matters worse, U.S. President Donald Trump is currently embroiled in a trade war with China’s Xi Jinping. The trade war appeared to slow down Tuesday as U.S. trade authorities slowed plans for new tariffs next month. Still, both countries have slapped billions in retaliatory tariffs against each other’s products.
In a global economy, a slowdown in one economic superpower has international repercussions.
“The trade war impacts China by slowing exports. And it impacts Germany by slowing demand in China for Germany’s exports. So everything from automobiles to intermediate products … has fallen off. You’ve seen demand plummet,” Schamotta said.
The slowdown could scare off investors even further.
“You’re looking at two economies decelerating very quickly and that is worsening the global environment and making it much less attractive for investors to be putting money in the financial markets,” Schamotta said.
WHAT ABOUT CANADA?
Canadians are seriously at risk in the event of a global recession, Schamotta said.
“We’re really sort of the victims in all of this,” he said.
Canadian households are carrying large amounts of debt. A recent Statistics Canada report found that household debt grew faster than income in the fourth quarter of 2018.
Schamotta described this level of debt as “ridiculously large” and suggested that Canadians could have a long way to fall in the event of a global recession.
“We’re in a situation where we’re not able to ride out the storm as well as we might have been historically,” he said.
