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Don't panic, we are not there yet

11 June 2019 Jonathan Faurie

Times are tough and a concern for many people is the possibility that we might be heading for another global economic recession. This concern was addressed at a recently held Prudential event.

Starting the journey

To effectively answer whether the world is heading for another recession, we need to look at the dynamics that are driving the market and whether they can provide any insight into telltale warning signs. 

“What we need to appreciate is the fact that the world is reaching the end of what has been a very prolonged growth cycle. This is slowing down as China is slowing down its economic growth. This has been something that the world has been worried about for the past three years. China has been important in the global economic growth story since it became the world’s largest economy,” said David Knee, Prudential CIO. 

There is another contributing factor that we have to consider before we can ascertain whether we are on track for a recession. 

Before recession hits, the SNP500 loses major value. At the beginning of the Global Financial Crisis, the SNP500 lost 50% of its value. In fact, in every recession since 1960, the SNP500 lost between 15% and 20% of its value. “In addition, the US suicide rate spikes significantly in times of economic recessions. The bad news is that the SNP500 is starting to lose value and US suicide rates are indeed increasing,” said Knee. 

A shift to the East

When looking at whether the world is on the precipice of a recession, many economic commentators have criticized the focus of China saying that more attention should be paid to developed economies (economies within the G7 block). 

But Knee is adamant that the significance of China cannot be ignored. “Traditionally, India and China have been the world’s most important economies and made up 50% of the world’s gross domestic product (GDP). There was a move away from these economies in favor of the G7, but there is now a shift back towards the East,” said Knee. 

Demographics is also changing the playing field. The world has a growing population. Yet, there has been a significant drop in the working age population since 2010. China saw a massive population growth in 2010 as it reassessed its infamous One-child policy. There has been a drop since then, but there is renewed focus on population growth once again. 

Welcoming signs

The fact that there is a shift away from the US towards China is good. China is slowing down its growth but is still managing to grow its economy by more than 5%. If this economy becomes the new center, is it necessarily a bad thing? 

There is another factor to consider. While there is a drop in the working population in the world’s largest economy, technology is going to be the world’s savior. Mechanization can replace labor intensive jobs and can contribute to economic growth in other ways such as making goods cheaper. 

Knee pointed out that within the next five years, there will be four million robots in production which will eventually be introduced into the Chinese job market. There are concerns about unemployment; however, the Chinese government feels confident about the fact that humans can be redeployed into the job space to do jobs that robots cannot do. Robots are not good at dealing with human emotions, so advice driven jobs will always have a place for humans. 

Again, if effectively done, the Chinese model can be used as a case study for other countries who need to increase their dependency on technology and redeploy jobs into the market. 

Are we headed for a recession?

So, are we headed for a global economic recession? 

“I feel that the contributing factors of a recession are present in the market. However, the warning signs that we are on the verge of a recession are not there. The world is building on its resilience and we just need to weather this current storm of uncertainty,” said Knee. 

How can this be done effectively? An individual that acts consistently can achieve powerful things. A group of individuals that act consistently can influence the market. Consistency is clearly what it’s all about when talking investments.   

Editor’s Thoughts:
A measured approach needs to take place when it comes to investing. As Knee said, this is not the time to make emotional investment decisions. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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