Statistically speaking, there is a global recession every eight years, and since the last one happened back in 2008, there is a big chance that another one will occur soon. Ever since the stock market crashed eight years ago, people have tried their best to aid in recovering the global economy. Even though there were some roadblocks along the way, recovery has taken place, and we’re currently doing much better.
But, like the old saying goes ‘you should always fix your roof when the sun is shining.’ Since stock markets are currently at record highs all around the globe, now would be a perfect time for you to double-check that all of your investments are in good order. Experts note that it’s only a matter of time that the global economy comes crashing down, and here are eight signs that prove it.
Instability in China
The Chinese economy has seen tremendous growth during the past few decades. In fact, the Chinese GDP is currently the 2nd in the world (only behind the United States). Not only that, but many experts believe that China will surpass the US in the near future.
China is also contributing more to global growth than any other country at the moment. However, due to the fact that the Chinese economy is currently experiencing a huge slowdown, it creates more risks for investors all across the globe. You might even remember that August 24 of last year became known as Black Monday, a time when the Chinese stock markets plummeted 8.5%. Many experts believe that the country might soon become a catalyst for the predicted global financial meltdown.
Since the Chinese government imposes capital controls to make sure the money stays within the nation’s borders, many middle class citizens are left with only a few choices when they want to invest their money. This caused the real estate and stock market to become too expensive, causing an economic bubble to form. The Chinese economy is so powerful that if it comes crashing down, it will likely drag the rest of world with it.
You may not have expected climate change to have an impact on the global economy, but it has definitely left its mark. Back in January of this year, there was a World Economic Forum held in Switzerland during which it was mentioned (for the first time ever) that climate change is currently the biggest risk of a global financial meltdown.
A report regarding this threat was also issued that noted that reasons why climate change represents a risk is because it causes food shortages, water crises, increased security risks, weaker societal cohesion, and increased security risks now more than ever. In addition, the geopolitical instability exposes numerous businesses to interrupted production, revoked licenses, damaged assets, cancelled projects, as well as restricted movement of funds across different countries.
These political problems make the threat of climate change much bigger, as it reduces the potential for political cooperation. Another issue that is constantly arising is the negligence of people who could be able to tackle the problem of climate change. While times have passed where people didn’t believe in a thing such global warming, many now accept the fact but refuse to do anything about it.
Lower Oil Prices
You’ve probably noticed that oil prices have dropped a lot recently. For some years, it was the norm to get oil at around $100 per barrel, but now you can get Brent crude (the international benchmark for oil) for $40 a barrel. This caused some companies to go bankrupt, and more than 250,000 oil workers to lose their jobs. One of the things that recently contributed to this fall in prices is the return of Iran to the global oil market, after the sanctions against the country have been lifted.
While you may feel blessed that you now have to pay less for gas, there is also a bad side to this oil price drop. Apart from people losing jobs, a lot of powerful countries are suffering economically as well, which may cause some political turbulence between them. Big oil companies are still in relatively good shape, but small independent ones don’t share the same fate, as many had to be closed down. These are all reasons why the oil price drop might as well lead to a global financial crisis. Many experts claim that oil prices aren’t likely to recover anytime soon.
Weak Productivity in the United States
Although the United States has the biggest GDP in the world, and their unemployment rate is really low at the moment (it’s currently at 4.9%, which means that it is at its lowest level ever since the crisis began), a different type of threat is currently facing the country. During the past five years, productivity has managed to grow an average of only 0.6%, which is extremely low compared to the postwar average of 2.2%.
Even though the US has a steady, huge GDP, and more people are getting jobs, the low levels in productivity may cause a completely different type of problem. Namely, it would practically mean that the living standards would improve extremely slowly, which we can already witness is really bad, since it gives a rise to an unhealthy economic populism in the US electorate. And that’s only a few years, imagine what it would be like if the country became stagnant for a few decades.
Even though we live in a world where a device that can easily fit into our pocket can help us get instant access to any kind of information we want, this doesn’t seem to make us more productive.
Free Money in Bond Markets
The richest nations in the world are borrowing money for free. The 10-year bond yield of Germany, Japan, and the United States has recently dropped below 1% for the first time in history. These rock-bottom rates even fall below zero when you take inflation into account, which leads investors to believe that we’re going nowhere.
If the global economy was in a good place, inflation would accelerate because of these bond yields. But on the contrary, inflation is on the slide. So much so that JPMorgan Chase & Co. predicts that the global rate could reach 1% if oil remains extremely cheap. To put things into perspective, during the Great Depression countries (including the United States) paid more to borrow money for a decade than they do now. Towards the end of the 2008 recession, the 10-year bond yield was above 2%.
There are two reasons for why this is happening. The first is that it could be a secular stagnation, while the other theory is that although central bankers are pursuing quantitative easing and cutting interest rates, investors could be thinking of a policy that must be even more creative in order for it to gain traction. Experts note that it’s pretty strange that this is happening after the panic phase of a global economy crisis, and not during one.
Lower Commodity Prices
We’ve talked about lower oil prices earlier, but it seems that a whole lot of commodities have seen a huge price drop recently as well. Whether it is sugar, plywood, soybean, or cotton, there has been a documented steady decline when it comes to a big number of commodities. The lower demand of these products is part of the reason why there has been a price drop.
Even though some commodity prices are getting higher due to local supply constraints or because of the effects of climate change, the ones that have been declining lately have a lot to do with the lower transportation costs that are caused by lower oil prices. However, some prices are constantly on the rise, mostly for chicken and beef, due to the expanding middle class in the world.
These drops in prices in slow-moving economies (for example, in Japan or Europe) could cause a long period of deflation, which would be incredibly hard to reverse. Especially if consumers and business would cut back on investing and spending money, because they would want to wait for the prices to decline even more.
Investor Confidence Crisis
Several months before the stock market crashed and the 2008 recession took place, the confidence that investors usually have seemed to have disappeared. They usually think that avoiding a stock market collapse is not that big of a problem, but their opinions rapidly changed starting six months before the stock market crashed.
Unfortunately, this is something that’s happening yet again and could be one of the best ways to tell that a financial crisis is definitely on the way. To back this information up, the Yale School of Management publishes a Crash Confidence Index every month, where you can see exactly how many investors believe that a stock market crash could be avoided in the succeeding six months.
The Crash Confidence Index notes that the confidence that there won’t be a stock market crash in the next six months has been generally declining ever since 1989. Then, it reached it’s all time low back in 2009, only months after the Lehman crisis. Since then, it has seen a recovery, but many experts believe that it could drop sooner rather than later.
People Are Starting to Talk About It
The surefire way to tell that an economic crisis is actually going to happen is to simply turn on the news or go online and read some articles. After all, a list like this would have no reason to exist if there wasn’t a pending financial meltdown.
At the beginning of 2016, the Royal Bank of Scotland decided to issue a note to clients that contained a very serious warning. Namely, it said that clients should sell everything except high quality bonds. The note even contained the sentence ‘In a crowded hall, exit doors are small.’ After the note was released to the public, it gained huge attention in the press all around the world, mostly because it is regarded to be the first major vocalization about the potential global economic crisis that may take place this year.
Recently, a strategist at the Societe Generale bank named Albert Edwards also noted that the financial crisis will awaken and that the developments in the global economy will push the United States back into recession. He noted that it will be just as bad as it was eight years ago.