Yahoo Finance Are we heading for a recession?
There are growing concerns that the UK and other countries around the world could be heading for a recession.
Why is everyone talking about a recession?
Markets reacted with alarm out on Wednesday, mainly due to the “inverted yield curve” – where essentially it became cheaper for the US and UK Governments to borrow money for 10 years versus two.
Typically, it should be the other way round and economists see it as one of the major warning lights on the global economic dashboard. The last time it happened was in 2007 – in the lead-up to the financial crisis.
In the US, an inverted yield curve has preceded every US recession since the 1950s.
So we are definitely having one?
Not quite. Some commentators are suggesting that there has been an overreaction and the falls on stock markets worldwide are more to do with the financial crisis still being fresh in the City’s mind.
But, it is not looking good. Stock markets tend to be one of the last major indicators of trouble and they are tanking. The FTSE 100 has lost more than 200 points in two days. Germany, France and the US are all struggling.
The German economy is also struggling, reporting a 0.1% fall in GDP for the second quarter. Two falls in a row technically means a recession.
The UK revealed a GDP fall of 0.2% in the same period, but, Brexit stockpiling could help the country avoid it.
What other warning signs are there?
Brexit has already spooked the currency markets, with the pound trading at historic lows against the dollar and euro. Economic data on retail sales, construction and manufacturing are all in negative territory. Although, the jobs market and wages are holding up reasonably well.
Property prices is a particular concern, especially in London, which is often seen as the engine of the UK housing market.
The Office for National Statistics (ONS) said this week that house prices in London are currently on a longer downward trend than was the case across 2008 and 2009.
Should I worry about overseas events?
Yes. If we are to have a recession, it will be primarily driven by global events such as the ongoing trade war between the US and China. President Donald Trump has constantly used his Twitter account to ramp up tensions, and threats of tariffs loom large.
Through massive devaluation of their currency and pumping vast sums of money into their system, the tens of billions of dollars that the U.S. is receiving is a gift from China. Prices not up, no inflation. Farmers getting more than China would be spending. Fake News won’t report!
— Donald J. Trump (@realDonaldTrump) August 13, 2019
China is having its own difficulties, and its own economic data is all pointing to a slowdown – which is difficult when the country buys so much from the rest of the world.
In fact, the FTSE 100’s collapse is more to do with international events than anything else, because most of the biggest companies on it trade in products like chemicals, oil and gas – all things China loves to buy.
Why should I be worried?
Markets are controlled by humans, and humans tend to follow the crowd. One of the biggest concerns is, if enough people believe we are heading for a recession, they may end up creating one through the panic, with a vicious circle ensuing.
If you have a pension, it is more than likely to be tied into the value of the stock market, and the value of the pound may continue to fall, making anything that relies on oil – like every lorry delivering shipments of bananas to our supermarkets – costing more.
Finally, if previous recessions are anything to go by, there could be house price falls.
What happened to the housing market after the previous downturn?
Price tumbles brought concerns about people being trapped in negative equity – meaning they had borrowed more than their property was now worth. House prices in the North East of England are yet to surpass their pre-downturn peak – showing just how long-lasting the effects have been.
Concerns were also raised about some people who had taken out interest-only mortgages – who had no realistic plan to pay off their debt once the mortgage term came to an end. Some had pinned their hopes on house prices continuing to rise. However, most banks have scrapped interest-only loans.
What about my job?
In the last downturn, the jobs market in the UK stayed strong, compared with other recessions in the UK, which also led to high inflation. But with a far more flexible workforce and immigration falling, the signs are that the jobs market can hold up, even if there is a recession.
Earlier this week, the Office for National Statistics said earnings growth is at an 11-year high, with weekly earnings in the three months to June up 3.9%.
However, in any recession, businesses tend to cut back on spending to wait out the storm, which could reduce expansion. A recession also tends to expose struggling companies, leading to more businesses going bust.
