“”The World Economic Forum, which hosts the high-profile power leaders and countries at Davos, in an annual Global Risk Report for 2018, said it feared that the next recession could be even worse than 2008 – and the trade war has grown out of control since that report was released.
““Central banks were crucial to restoring economic confidence among households, businesses and markets after the crisis. Repeating that feat could be a struggle without interest rates at their disposal. And without a floor placed under confidence, the risk of the next downturn being much deeper and longer than might otherwise be the case would increase,” the WEF wrote.
“Increasingly, experts and finance giants are sounding the alarm bells over a trade war that could be the trigger for a global recession.
“According to Chetan Ahya, Morgan Stanley’s chief economist and global head of economics, “If talks stall, no deal is agreed upon and the U.S. imposes 25% tariffs on the remaining $300 billion of imports from China, we see the global economy heading towards recession.””
“Perhaps surprising no one, global manufacturing is now in contraction mode for the first time since 2012. That’s according to the most recent reading of the sector’s health, the purchasing manager’s index (PMI), which headed lower for a record 13th straight month in May.
“The PMI posted 49.8, down from 50.4 a month earlier. As a reminder, anything above 50.0 indicates expansion; anything below, contraction.”
“Global semiconductor sales dropped 14.6% in April from April last year… The three-month moving average in April has plunged 24% from the peak last October, thus continuing the deepest plunge in semiconductor sales since the Financial Crisis…
“The global decline in demand for smartphones and PCs – both now mature markets – would have been enough to turn chip sales down.
“But the China trade issues, the frontrunning of tariffs and export controls, the stockpiling of chips, now topped off by actual tariffs and export controls did much of the rest.”
“Markets are getting so nervous about another downturn that they have has begun to price in several cuts in official interest rates from the Federal Reserve.
“For perspective, as recently as the fall of 2018, investors were predicting as many as four interest rate increases.
“The swing in sentiment been nauseatingly abrupt, and it reached fever pitch last week.”
“The Trump administration banned cruises to Cuba under new restrictions on U.S. travel to the Caribbean island imposed on Tuesday to pressure its Communist government to reform and stop supporting Venezuelan President Nicolas Maduro.
“The tightening of the decades-old U.S. embargo on Cuba will further wound its crippled economy…”
“Venezuela has failed to make interest payments on a gold swap agreement valued at $750M with Deutsche Bank (NYSE:DB), leading the lender to take possession of the precious metal used as collateral, Bloomberg reports, citing two people with direct knowledge of the matter…
“Venezuela’s gold holdings, one of Maduro’s few sources of capital to keep his regime going and his military forces loyal, have been shrinking.”
“Economic activity in Brazil shrank in May, IHS Markit’s monthly purchasing managers index surveys showed on Wednesday, raising the risk that Latin America’s largest economy could be back in recession.
“The services PMI showed services sector activity fell at an even faster rate than in April, while following Monday’s manufacturing data, the composite PMI fell into contractionary territory…”
“British economic growth almost ground to a halt last month, as modest expansion among services firms barely offset weakness in manufacturing and construction caused by the Brexit crisis and weaker global growth, a business survey showed on Wednesday.”
“The International Monetary Fund has identified Italy’s debt as a major risk to the euro zone economy, together with global trade tensions and a hard Brexit, an EU source told Reuters on Wednesday, anticipating a report the IMF will present next week.”
“The EU Commission has begun a legal process that could mean unprecedented sanctions and financial oversight of Europe’s fourth-largest economy. Italy aims to change the rules that could lead to its censure.”
“Boosting liquidity to the financial system on Thursday, China’s central bank signaled its readiness to supply smaller banks with a steady stream of cash after the takeover of a troubled lender, letting more banks access the funds…
“Thursday’s liquidity injection comes after regulators seized control of Inner Mongolia-based Baoshang Bank on May 24, citing serious credit risks.
“The move drove interbank financing costs higher and sparked worries about the broader economy.”
“An influential Chinese auto-industry trade group has asked authorities to unleash stimulus measures to counter the sector’s worst slump in a generation.
“The state-backed China Association of Automobile Manufacturers asked authorities to relax limits on license plates issued in some cities and lower levies paid by vehicle buyers in rural areas, according to Xu Haidong, an assistant secretary general at the group.”
“Bloomberg Economics has modeled a worst-case scenario of 25% tariffs on all U.S.-China trade and all U.S.-Mexico trade and also added in a 10% drop in global equity prices. In that all-out trade war, global GDP in 2021 would be lower by 0.8% — equivalent to $800 billion — relative to a no trade war scenario.”
“Always volatile, oil prices have tumbled more than 20 percent since late April because of growing fears that demand is weaker than expected as the global economy slows.
“Investors are also worried that President Trump’s trade war with China and his threat to put tariffs on imports from Mexico could depress growth even more.”
“From within financial systems, a crisis can become deeper through a ‘doom loop’ mechanism. Today low interest rates have led to a buildup of debt because it’s cheap to borrow. Corporate debt is at historic highs, creating considerable concern for UK and US officials. Household debt is also high.
“High sovereign debt could also bring down already weak banks if their exposure to the debt loses value, forcing governments to bail out the banks. This would create more sovereign debt, leading to downgrading of the sovereign debt held by the banks, which in turn makes the bank balance sheets look worse and triggers further bail outs. Each step in turn sends institutions spiraling down.”
“Mario Draghi pledged to do “whatever it takes” in 2012, buying government bonds to stop the panic in the eurozone debt and banking crisis. The result was cheery markets but debt-laden governments and unreformed economies.
“The same action on a global scale could lead to debt mountains everywhere. As an example, the US is already running a vast budget deficit in the good years – with QE backing it. This could go exponential in a slump.
“Such forecasts sound a lot like monetary financing – printing money to fund Government spending, which is anathema to independent central bankers.
“The likes of Powell, Draghi and Mark Carney say that they are only employing QE in order to hit their inflation targets. If it starts funding government spending then there is a risk that inflation could get out of hand.
“Countries such as Italy are already struggling with their debt levels. Rome’s Government wants to borrow and spend more and is facing a new battle with the EU over its borrowing plans. The temptation for extra borrowing and spending, backed by ECB bond purchases, could spark chaos.”