In recent months there have been some strong indicators that the world is heading or is in a global recession. Stock market crashes in China, declining shipments, cheap oil, and political uncertainty are all indicators that viewed separately may not be big news or worrisome, but when you put them together as a whole, it is time to start worrying about the world economy and what the implications will mean for the average folk.
Last month, the Royal Bank of Scotland warned that investors would face a “cataclysmic year” and advised its clients to Sell Everything except high quality bonds. Now I wouldn’t advise to selling everything, your investment advisor would be the best person to direct you on how to weather the upcoming storm.
Trouble in China
In the month of January, the Chinese stock market crashed several times. Hints at lower then expected exports and their raising debt has made a lot of investors edgy. Is China in trouble? Far from it. According to insiders, China’s domestic economy is booming as the Chinese embrace Western consumerism. So the Chinese government is starting to focus inward instead of being the dominant exporter they use to be. With all the panic of investors believing there is trouble in China, stock markets around the world have been driven down to some of the lowest levels since 2007-2008.
Shipments Are On the Decline
Two key indicators that have been it the news lately are declining cargo shipments and declining US Rail Traffic. Gillian Tett from the Financial Times points out that the Baltic Dry Index which measures shipment costs of raw materials and is one of the key indicators of economic growth has declined 75% in the past six months. Despite the US reporting that its economy is strong and growing, The Bank of America says the US Rail Traffic has been steadily declining and dipped to its lowest level since 2009. Even though coal (which is the bulk of rail shipments) has been steadily declining as more environment friendly energy incentives come online, there are indications of reduced shipments of other materials due to the decline in manufacturing in America.
With oil prices continuing to its free-fall to maybe as low as $16 a barrel, Canada and many emerging markets are struggling because they are dependent on revenue from heavy resources such as oil. Alberta’s economy has tanked as oil sand production has reduced or halted creating a negative domino effect for the rest of Canada.
The oversupply of oil can attributed to an increase of production in US shale deposits from North Dakota. Even they are suffering the ill effects of low oil prices and the boom in North Dakota ended in 2014. Recently to compound the oil price crisis, Iran’s trade sanctions have been lifted and it is projected to export a million barrels a day. Saudi Arabia has indicted that they will not reduce production of their cheap oil as it fears that they will lose market share and to force US shale oil producers into bankruptcy with the low oil prices as they are heavily in debt.
UPDATE: After this writing, Saudi Arabia did agree, along with Russia to cut production only if other OPEC and Non-OPEC nations agreed to the same. There is a very slim chance of this happening.
There are signs that some countries that form the European Unit (EU) are wanting to break away from it. Britain is showing its intent. Other countries are growing weary bailing out Greece and other weak countries and the whole refugee crisis in Europe has everyone up in arms regarding who is going to pay for all of it.
Later this year, the US will be electing a new President. The top leading candidate for the Republicans is Donald Trump and for the Democrats, it is Bernie Sanders. Both are populists and are against the existing political establishments that have ruled for several decades. Both candidates want to nullify all existing trade deals including the recently signed Trans-Pacific Partnership (TPP) and are willing to enforce US protectionism. They claim that this is how to get America back by producing and manufacturing and putting people back to work.
Could we see the end of globalization as a global recession starts to take hold and countries start to fend for themselves? Are we seeing that globalization was not what it was cracked up to be? Find out in my next post.