Global Recession Fears Rise Amid Economic Weakness
The global economic outlook is increasingly clouded by concerns of a potential recession. Recent economic data—including the contraction of the British economy, slowing global oil demand, and unexpected job losses in Canada—has fueled anxieties amongst economists. Furthermore, the recent threat of new tariffs from the U.S., along with the ongoing trade disputes, adds another layer of uncertainty.
Several factors contribute to this heightened concern. The International Monetary Fund has revised down its global growth forecasts, lowering them to 3.2% for 2019 after previously predicting 3.6%. This downward adjustment reflects the growing impact of trade tensions and policy uncertainties. The United States’ President recently announced plans to hit China with a new round of tariffs, building upon the existing $250 billion in levies. This move intensifies the trade war and creates a significant risk to global growth. Additionally, the International Energy Agency has noted a slowdown in global oil demand growth, the lowest since the financial crisis. Canada, despite experiencing wage growth, also saw a surprising 24,200 jobs lost last month, adding to the signs of potential weakness.
Economists at Morgan Stanley, along with other institutions, believe that the heightened uncertainty—often referred to as “fog”—will likely persist. They estimate a 55% chance of a recession within 12 months in the U.S., peaking at 2007 levels. This estimate is based partially on a U.S. Treasury bonds model. This sentiment is echoed by the J.P. Morgan Global Manufacturing Purchasing Managers Index, revealing a decline in worldwide manufacturing production, further decreasing new order intakes. The survey highlighted shrinking export business across various countries, indicating a broader slowdown in global trade. International trade volumes contracted for the eleventh month in a row and to the greatest extent since October 2012.
Investor and business confidence has also cooled. The S&P 500 and Toronto Stock Exchange indices have fallen more than 1.8% and about one percent respectively over the past month, suggesting a cautious approach by investors and businesses. Bank of Montreal chief economist Doug Porter reported that businesses and consumers have been displaying subdued sentiments. Moreover, the psychology of consumers could shift, reducing demand and having broader global implications on trade.
Central banks are grappling with these challenges. The Bank of Canada, for example, has been monitoring the situation closely. Just last month, the bank’s senior deputy governor, Carolyn Wilkins, explicitly mentioned the trade picture as “the biggest wild card” for their outlook. The central bank presented two “extreme scenarios” in its monetary policy report. One scenario featured intensified trade spats and tariffs, while the other showed a resolution. Even in the more optimistic scenario, the global economy would still see growth 1% higher than predicted if tariffs were removed, but that’s a considerable “if.”
However, while these central banks could provide support, they may not be able to effectively drive a recovery until trade policy uncertainty is resolved. The Morgan Stanley economists suggest that if the U.S. were to put 25-percent tariffs on all imports from China for four to six months, and if China were to respond in kind, “we believe we would see the global economy entering recession in three quarters.”
Several smaller concerns contribute to the overall picture. The Canadian housing market is experiencing a cooling period, influenced by government policies—such as a “stress test”—and anxieties about future affordability. Growing consumer debt adds to the risk. The International Monetary Fund cautioned about the potential for a sharp downturn in Canada if its two biggest export markets—the U.S. and China—were to suffer further economic hardship.
Furthermore, international investor sentiment indicates a flight to safety, with gold reaching a six-year high, and Bitcoin experiencing an 18% increase in value. The volatility reflects a general increase in risk aversion among investors. Finally, concerns persist about the trade dispute between the U.S. and Mexico, with President Trump threatening tariffs on Mexican imports to stop illegal immigration.
Ultimately, the ongoing trade tensions—particularly the U.S. actions—are continuing to fuel the uncertainty and risk of a global recession. Benjamin Tal, an economist at the Canadian Imperial Bank of Commerce, stated, “The fog is not going to clear, because Trump doesn’t want it to clear.” The situation underscores the need for coordinated global action to address trade disputes and resolve uncertainty to prevent a deeper economic downturn.
