Global Economy: A recession is around the corner
An oil glut, Chinese slump, Greek default and bearish markets may hit global economy
The united States of America is often referred to as the Big Brother due to its economic impact on both developed and developing countries every time there is a recession or fear of recession hitting it.
Being one of the world's dominating economies, many factors contribute towards setting a trend for either bulls or bears to walk on Wall Street. Even though recession is not new to the Big Brother, it is bad news both for it and countries that depend on a bullish US economy. So, will history repeat itself soon? Is it time for bears to take over Wall Street?
The crash of the world's major stock markets (Black Monday) on August 24 pushed indices to the year's lowest point. Experts are citing many reasons. Some blame China's economic downturn and its falling stock market for kick starting global recession as it is one of the largest economies.
Others predict the present situation as the start of recession, referring to Greece's recent default and citing possible defaults by nations such as Italy and Portugal, which are also indebted nations.
Going back in time, today's scenario can be compared to the recession of the '70s that affected the Big Brother - from November 1973 until March 1975. The oil crisis, increased competition in the metal industry triggering a steel crisis, and a peak unemployment rate of nine per cent were considered the major culprits behind the recession.
Let us analyse the present situation based on the above factors.
Crude oil production
During my research, I could not find any report stating an oil producing or exporting country considered a reduction in output even when crude prices trended below $40 per barrel and suggested it could dip further.
From 1966 to 1973, crude production was increasing on an average but in the period of 1974 to 1975, output dropped drastically. There was an increase in production of crude oil from 2006 to 2014, with the latter being the year of highest production. For 2015, as we only have data till July, we can see crude production is far below the monthly production average of the preceding years.
Soon, the time will come when major oil-producing nations will be forced to limit output to revive oil prices because it may become difficult for these countries to survive, especially if their economies are strongly supported by crude oil. That would be a mirror image of 1972-'75 where production rates were decreasing. So in 2015, 2016 and 2017, we could witness lower production of crude oil, which could again trigger a rise in oil prices.
Current data shows the US unemployment rate for the month of July 2015 is 5.3 per cent - it is the lowest since 2008.
The unemployment rate from 1971 to 1974 gave signs of a strong US economy, with the rate begged at 4.9 per cent in 1973. But in 1975, the rate increased suddenly. A similar pattern of a falling unemployment rate from 8.9 per cent to 5.5 per cent can be seen from 2011 till 2015.
If we take into account the unemployment rate from 1971 until 2015, the US witnessed the lowest rate of four per cent in 2000. So, the room for unemployment rate to reduce further is less, but there is scope for increment. The US witnessed the highest unemployment rate of 9.7 per cent in 1982.
From 1973 until 2009, the Big Brother witnessed six recessions. The occurrence of each recession compared to the previous one is approximately 5.5 years on an average. The duration of each recession is 12 months on average. So, based on these numbers, we can assume that the next recession will start from 2015 and last for a year.
There are other factors that could aggravate this process. As per the World Bank, China has surpassed the US and gained top spot in the world economy in terms of gross domestic product (GDP). But after crossing the 4,986 mark in May 2015, the Shanghai Composite Index was down by 35.5 per cent to 3,209 on August 24.
Greece formally defaulted on a $1.7 billion payment to the International Monetary Fund in June 2015. The Dow Jones Industrial Metals and Mining Index slumped to 142.4 (on August 24) after touching a high of 227 in January. On January 1, 2012, crude oil hit a high of $103.74. It is now trading at $38.74 (August 24), at a six-and-a-half year low. Brazil is also on the brink of a recession, which could extend up to two years as per Brazilian banks.
Considering the above analysis and present condition of the financial markets, the occurrence of a recession cannot be ruled out. But, since we have witnessed so many economic downturns in the last millennium, some confidence can be reposed in governments and major financial institutions that they will be well prepared for a crisis.
Amitkumar Maity is a financial market trader and have experience as project and finance manager for various firms in India, UK and the UAE.
Ramona Singh is a corporate trainer and consultant with Blue Ocean Training and Consultancy in Dubai. Views expressed by the authors are their own and do not reflect the newspaper's policy.
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