- August 24, 2019
- Posted by: Ramkumar
- Category: Strategy
Recession in 2020
In this blog, we shall discuss some of the statistical patterns that indicate whether a recession in 2020 would happen.These statistical patterns are found to be consistent and present in all the previous recessions.
We will also find out the causal reason behind these statistical patterns and the excessive imbalances that was there in the economy system which resulted in these statistical patterns.
Finally we will predict whether the current global economy situation exhibit these statistical patterns and display any excessive imbalances to say that we are heading towards a recession.
Conundrum of Recession in 2020
- Many few analysts and economists are accurately able to predict the coming of recession.Inspite of several indicators and metrics that point towards a recession, many economists are not able to truly value the magnitude of these indicators to accurately predict the timing of the recession.
- Some economists overestimate these indicators to give a pessimistic view of the economic climate while others underestimate the risks and imbalances in the economy.
- For instance in US, the Fed system appreciated the resilience of the housing system in 2007 when the housing prices started to decline.They were not able to predict that the housing market is in a bubble especially among the sub prime mortgage homes and all set for a crash.
Statistical patterns that indicate a recession in 2020
- There are three statistical patterns that indicates a recession.These statistical patterns were consistent and displayed the same trends in all other previous recessions.
Long economic expansion cycle
- A recession is always followed by an expansion cycle.The expansion cycle generally is there on an average for ten years.
- There are some countries like Australia where the economy is expanding for past 27 years and have shown no signs of decline.These are to be considered more as exceptions than a normal scenario.
- In the case of US, the economy is on an expansion from 2009 till August 2019.This indicates that the country is in a expansion phase for 10 years.The longest expansion cycle was from 1991 to 2001 which was for the duration of 120 months.
- This indicates that the expansion cycle can be difficult to sustain and there are more chances of a slowdown happening in near future.
Invert Yield curve
- Right before a recession, the yield curve exhibits an inversion curve.
- This happens because bond holders and investors are anxious about the economy and do not want to invest their money on short term bonds.Instead they prefer to invest on long term bonds like 10 year Treasury bonds.It is well known that as the demand for bonds increases, the bond rates increase which would lower the yield rate.The difference between the long term and short term interest rates increases as investors are no longer confident about the near term prospects of the economy.
- Although an inverted yield curve does not guarantee the occurence of recession, it is observed that if the inverted yield curve persists for some time then the recession generally occurs within 3-6 months.
- In the case of the economic expansion, the unemployment rate comes down and is at an all time low.
- In 2009 when the recession ended, the unemployment rate was at an all time high but as the economy started to recover, the unemployed rates started to come down.
- As the unemployment rates becomes very low then the interest rates are generally increased.This would be generally reflected by the flattening of the yield curve which indicates the unemployment rate continues to be low for 2-3 years.
- In the current scenario, the slope of the yield curve and its relationship with unemployment rate is V-Shaped which means the interest rates needs to be either flat or reduced to ensure the economy expands and unemployment rate stays at all time low.
Causal reason behind the Recession in 2020
- Though the above are the statistical trends which generally occur before every recession, there is a causal reason which triggered these statistical patterns.
- In the case of 2008 recession, it was the sub prime mortgage crisis and the housing boom which was responsible for the heavy imbalance in the asset prices.
- In the case of 2001 recession, this was due to the dot com boom where the stock prices were overvalued at all time high.A correction in these prices resulted in a crash in the markets.
- These two imbalances in 2001 and 2008 were actually not considered as risks by the analysts at that time.
- At the same time, it is not necessary that everytime there needs to be a heavy economic imbalances that precedes the recession. In case of 1991 US recession, this was due to the combination of smaller risks and the Gulf war which pushed the economy to a recession.
Current Economy predictions
- When we look at the current economy, all the three statistical patterns that indicate a recession are displayed which is Inverted Yield rate, low unemployment rate and economy expansion for more than 10 years.
- When we look at the causal reason for a recession, at this time there isn’t any risky imbalance that is observed.The stock markets are not inflated and there are no housing boom or dot com boom.
- There are some geopolitical concerns like US China Trade war, US Iran war and Brexit crisis.The European economy is also undergoing a recession due to manufacturing and banking crisis.
- If the economists are able to navigate these above risks and at the same time able to maintain the economy momentum, then there is every chance that the expansion would continue for next 2-3 years.
- Statistical patterns suggest that global economy is moving towards a slowdown or perhaps even a recession in 2020.
- Can this time be different as there is no imbalances observed like high stock prices in dot com boom or high housing prices in sub prime mortgage crisis.
- To rule out a recession, we need to ensure that no such imbalances exists currently and we can navigate the current political, economic and trade risks without a significant global economic slowdown.
- Time will only answer whether this can happen.