Nine Signs That a New Global Recession Has Arrived

Economists and policy makers in large countries and organizations like the International Monetary Fund and World Bank have expressed concern that the world has entered a global recession barely a year after the deep downturn of 2008-2009. Research supports that this recession will not be short or mild. The most obvious effects have materialized in the U.S., UK, EU and Japan. U.S. gross domestic product was sluggish at well under 2% expansion in the second quarter. Japan’s GDP fell 0.3% in the same period. Germany, the bedrock of the eurozone, said its GDP rose only 1% in the second quarter. The economic reality of these regions will seriously hamper the rapid expansion of the BRICs. The GDP growth in the BRIC countries is largely dependent on their exports to the developed world.

Read: The Nine Signs That A New Global Recession Has Arrived

Recessions are generally measured by GDP contraction, but there are other indicators that are nearly as important. Global shipping capacity is one of these. Civil wars are another because they can destroy entire national economies. The increase in the number of people who are malnourished is a marker for a global decrease in consumption of goods in the countries where the poorest live. Household incomes generally fall in a recession, and unemployment either rises or stays at very high levels established in a previous downturn. Government spending should help stimulate business and consumer activity, but decreases in it remove the single most important safety net that a faltering recovery needs.

The Nine Signs That A New Global Recession Has Arrived
1. Shipping
Shipping is a critical indicator of global financial health because so many of the world’s goods travel by sea. This includes everything from crude oil to agricultural products to autos. Industry giant AP Moller-Maersk recently reported earnings and said demand had declined sharply. The latest data about dry bulk commodities-shipping costs, as tracked by the Baltic Dry Index, revealed that rates have fallen by a third so far this year. Hanjin Shipping, Orient Overseas and Mitsui OSK Lines have not been able to put into effect normal surcharges that go with peak demand periods, which is an important way that the industry makes money, according to Bloomberg. That is because there simply is not enough demand for the movement of goods from nation to nation.

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2. GDP Forecasts
Global economic organizations cut GDP forecasts simultaneously.  The Organization for Economic Cooperation and Development’s May report on GDP improvement among its member nations said the economic expansion had faltered and the decline was expected to continue into 2012. The IMF made similar comments in June. The World Bank also expects a slowdown in global expansion and warned that prices of commodities and oil could cripple any further expansion. Each of these groups is unrelated to the others, so the appearance of red flags from all of them is significant. Each also has the capacity to gather data from most countries around the world, which makes their research capacities unique.

3. Oil demand falls
OPEC cut forecasts for demand. Last month OPEC released a report with its predictions for the year and stated, “Concerns over debt levels in Europe and the U.S., and signs of slowing economic growth in China and India, have spooked the market and raised fears in some quarters of a double-dip recession.” The IEA noted in its most recently Monthly Oil Market Report that, “For the first time since March 2009, China’s monthly apparent demand contracted on an annual basis, falling by 1.5% in June.” It added that, “The decline coincided with evidence that China’s economy is also slowing down and that higher end-user prices are weighing upon demand.” Oil prices are the single most important signal of crude demand. WTI crude has fallen from $105 a barrel less than three months ago to under $80 recently.

4. Stock markets retreat
The world’s major stock markets retreat in lock step. The stock indices in virtually every major nation have had large sell-offs recently. Markets in regions where investors believe that growth will continue to be robust ought to at least trade at the levels they did in early summer, but none do. The Dow Jones Industrial Average and other major indices in the U.S. have fallen 15% recently. Germany’s DAX has struggled after news that the economy there has slowed considerably, which had an impact on stock prices. The UK may already be in recession and its FTSE index shows this. France’s CAC 40 is down as well. In Japan, the Nikkei is down more than 10% in the past month. The stock markets in the strongest regions economically should be doing better at least. But Hong Kong’s Hang Seng is down over 10% in the last month, as is Brazil’s Bovespa. The signals from these stock markets show that the slowdown has spread well beyond the developed world.

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5. Unemployment
Unemployment problems worsen across a number of larger nations. The economies with the greatest debt problems in the developed world also tend to have the highest unemployment. The level is 15% in Greece. In Ireland, the number is 14%, and it is 21% in Spain. Government stimulus packages in these nations have become economically impossible as far as political leaders are concerned. But slow-growth nations are not the sum of the trouble. In an analysis of China’s employment level, The Christian Post reported that, “The CIA Factbook records the unemployment figure for China as being under 4 percent, but this percent includes an asterisk that reads: ‘the data is for urban areas only; including migrants may boost total unemployment to 9.’” A drop in the need for exports due to decreased demand in Japan and the West would drive this Chinese joblessness figure higher.

6. Civil War
Effects of civil war. The battle to build democracy in Egypt has badly damaged the nation’s finances, as many businesses have either closed or had sales damaged by the chaos in the country that has still not elected a new permanent government. The situation in Libya is worse, and the problem persists in other nations beset by unrest in the region. The effects are more than trivial. Egypt is the 40th largest economy in the world, based on GDP. Syria, Libya and Iraq are all in the top 70. Protracted civil unrest and the disappearance of an organized economy in these countries will continue to impact exports to these nations.

7. The Poor
Numbers of the impoverished rise. The number of people who live below the poverty line and have poor access to food has risen sharply this year. The UN pointed out as part of the research for its United Nations Conference on Sustainable Development that even though global GDP has increased by 60% since 1992, certain parts of the world have recorded no growth at all. These regions, which account for meaningful global consumption in sum, albeit at a relatively low level, have been hurt further by drought, flood and food prices. At the start of the year, the World Bank reported that,  “rising food prices have driven an estimated 44 million people into poverty in developing countries since last June.” Many of the poorest nations need to expand their farming capacity, which could be a source for machinery and seed demand elsewhere. But necessary aid initiatives cannot be funded or circumstances are such that the planting of crops is nearly impossible.

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8. Government spending cuts
Economic expansion in the U.S., UK, Greece, France, Italy and Spain depends on government spending, to a large extent. That is especially so when the global economy is poor. Rather than increase spending, many nations have slashed their budgets. The eurozone financial crisis is so bad that Greece, Portugal, Italy, Spain and the UK have all cut or pledged to cut government spending significantly to implement austerity programs. These are meant to offset rises in national deficits. The U.S. has begun a similar process, the first stage of which must be finished by November.

9. Wall St. turns against growth
The largest banks and brokerages, perhaps more than any other group, want businesses and investors to believe that the economy will expand. Their income from M&A transactions, individual investing, corporate debt activity and IPOs are all based on robust expansion. Now, some of the largest investment houses have begun to voice pessimism. Morgan Stanley recently cut its estimates for global growth. The bank said the U.S. and eurozone are “hovering dangerously close to recession.” Goldman Sachs also lowered its global GDP forecast. It focused also on dangers in the U.S. and Europe, listing sovereign debt problems and the lack of government financial support to national economies as cause for concern.

Douglas A. McIntyre