Saturday, August 15, 2015

Global Economic Slowdown Raises Fears of Broad Recession

The signs of a global economic slowdown are everywhere, and they are numerous.

Economies around the world -- both big and small, developed and emerging -- are hurting.

Japan’s economy contracted in the second quarter (April-June) as exports slumped and consumers cut back on spending.

The world’s third-largest economy shrank at an annualized rate of 1.6 percent in the second quarter, after expanding 3.9 percent in the first quarter.

This is despite the fact that the Bank of Japan is engaged in a massive monetary stimulus plan intended to end two decades of deflation and economic decay.

Living standards have steadily eroded and per capita incomes today are 10 percent below the level of 1990.

It is a positively nightmarish scenario for Japan if its monetary stimulus policy is failing.

Then there's China, the world's second largest economy.

Though China reported that its economy expanded at a 7 percent annualized clip in the second quarter, no one believed them. And it was for good reason.

Chinese exports fell 8.3 percent in July, its stock markets have been crashing, and it is confronting the collapse of its real estate market.

Meanwhile, China’s index of producer prices declined 5.4 percent from a year earlier in July, the most since 2009 and and the 40th straight month of price decline, raising fears of deflation.

China responded by devaluing its currency this week. It was a rather blatant sign of desperation, indicating that its economy is much worse than officials are admitting. If that’s the case, it’s a very bad omen for the global economy.

Chinese authorities don’t just look desperate; they look clueless. Free markets aren’t manipulated markets.

In the same way that Wall St. is manipulated by bankers, China's markets are manipulated by government officials.

China has a decades-long history of dictating top-down, state-planned, authoritarian policies. The leadership simply implements policy by force of will. However, markets don’t work like that.

The Asian giant is trying a first-of-its-kind attempt at a communism / capitalism hybrid. The notion of such a thing seems schizophrenic, and perhaps it is finally proving to be so.

The decline of China’s economy is bad news for Brazil’s economy, which is heavily dependent on commodities exports (as are Australia, South Africa and other emerging markets).

Brazil is already in recession, and its economy will shrink 2.3 percent by the end of the year, says Bank of America Merrill Lynch. The bank also predicts a recession in 2016.

Brazil's currency is plummeting, having fallen 34 percent against the dollar this year to its lowest point since 2003.

Russia has been driven into recession by a combination of plunging oil prices and Western sanctions. Its economy contracted 4.6 percent in the second quarter, its weakest performance since 2009.

In short, without oil and natural gas, Russia wouldn’t have an economy.

Inflation plagues Russia; the annual pace of price growth has remained above 15 percent for several months, far above the central bank’s 4 percent target.

Eurozone growth has also slowed. The 19-nation economic bloc expanded just 0.3 percent in the second quarter, which followed a meager 0.4 percent gain in the first quarter.

Analysts at Capital Economics said the eurozone would likely continue slow growth.

Even our northern neighbor, Canada, is in recession as a result of collapsing oil prices.

Around the globe, the warning signals are flashing.

Commodities prices are collapsing. Many have fallen to bear market levels last seen in 2008. We all remember what happened then.

From Bloomberg:

"Eighteen of the 22 components in the Bloomberg Commodity Index have dropped at least 20 percent from recent closing highs, meeting the common definition of a bear market. That’s the same number as at the end of October 2008, when deepening financial turmoil sent global markets into a swoon."

The US has the world’s biggest, most powerful economy. Yet, it is not immune to the ailments of the rest of the world. The gravitational pull of a global recession would suck the US right into its own downward spiral.

As I’ve noted many times, the US economy is not what it used to be.

Our economy remains stuck at around 2 percent annual growth, well below our long term average of 3.3 percent annually. In fact, the US hasn’t topped the 3 percent mark in a decade — the longest such stretch in modern times.

In the minds of many Americans, things seem tenuous. Consumer confidence surveys continually show this.

Just 41 percent of Americans said the economy is good, and 57 percent said it is poor in a July AP-GfK poll.

Confidence is everything for an economy that relies so heavily on consumer spending; 70 percent of US GDP is derived from it.

When Americans hear about the economic woes, financial turmoil and outright recessions in other parts of the world, perhaps they’re asking, “What if we’re next?"

It’s a reasonable question.

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