WHAT CAUSES RECESSIONS?

Global economic growth continues to slow down. We are seeing this on ISM manufacturing figures across the planet and exports from countries like Germany, Japan and South Korea. The US manufacturing ISM remains in expansionary territory, but at its lowest level in 28 months. Home resales seem to rebound with a 4.6% rise in January, helping to partially mitigate the negative impact caused by the 11.2% slump of housing starts in December.

China announced that its targeted growth rate for 2019 would be around 6% to 6.5%, versus 6.6% published for the year 2018. The decline continues but remains within the norm considering the size of the Chinese economy.

The OECD (Organization for Economic Co-operation and Development) is still forecasting a global growth of 3.5% for 2019. In my opinion, it will be lower, but not below zero, meaning no recession.

What causes a recession?

Alarmists will talk about a looming recession these days, but let’s have a look at what actually causes recessions and why we are hearing such sombre predictions. After 10 years of growth, many believe a recession is unavoidable. Nevertheless, recessions don’t happen simply because the economy has been prolific for 10 years. If we take into account past economic cycles in Canada, we notice that recessions have been caused by sharp surges in interest rates, or a certain kind of blow to the economy.

Looking at historical data from the Canadian economy, we can learn a lot about the causes of past recessions. What the graph shows is that the Canadian economy has gone through four recessions in the last 40 years.

The first, in 1981, was attributable to a sharp rise in interest rates. When the inflation rate reached 12%, the Bank of Canada responded by raising rates to 19%. The strategy worked; inflation declined, but high interest rates led to a major recession.

In 1991, the trigger was rising oil prices, leading to a global recession. More recently, a housing bubble in the United States led to a financial crisis in 2007-2008, which was followed by another major global recession. Finally, the 60% drop in oil prices in 2014 caused a six-month recession in Canada.

Note that from 1991 to 2007, the economic cycle lasted 16 years. As there is currently no sustained inflation, interest rates should not increase significantly. A real estate crisis is possible in Canada, but very unlikely in the United States. Oil prices are controlled by US production at record levels and excluding OPEC (Organization of the Petroleum Exporting Countries).

In short, scaremongers could be disappointed for several months...

American Stock Market

The S&P 500 Index has been going up for a month, around 2,800 points. The yield curve just inverted, a recession signal, but when? I will cover this topic in my next newsletter in April.

Please note that this statement reflects my opinion and does not constitute investment advice. Each person’s unique financial situation will affect their appropriate choices.

I invite you to send me your questions, to which I can respond in the next newsletter for the benefit of all.