Is anywhere safe from recession?
You might want to sit down before you read this article. I don’t want to worry you, but apparently the International Monetary Fund (IMF) reckons the global economy’s in a spot of bother. No, really. Apparently, some countries might even be facing recession.
Who’d have thought it? And there you were, thinking that mass nationalisations, co-ordinated interest rate cuts and 1,000-point weekly falls in the FTSE 100 were all just part of everyday life in the financial markets.
I shouldn’t poke too much fun at the IMF – after all, we might all need a loan from them one day. It’s pretty clear that the global economy’s in deep trouble and the trouble is, in a globalised economy, there’s nowhere to hide.
This financial crisis has resulted from a bubble in money – or more accurately, in debt. And unlike most other bubbles, this one has been in no way productive. The tech boom wiped out a lot of investors’ money, but it gave us the key infrastructure for today’s internet.
All we’ve seen in this bubble is the price of assets – most obviously property – hugely inflated, as borrowed money pushed them higher, allowing more money to be borrowed against them and so on. These debts have been sliced and diced and traded around the world, so that when the inevitable happened and some of the debts started to go bad, the entire financial system was so thinly stretched and interconnected that the whole thing came tumbling down.
So let’s take a whistle-stop global tour and see how this is going to affect the world economy. We’ll kick off where the first symptoms of the crisis – the subprime mortgage collapse – were revealed.
Focus on the banking crisis
The US
US political pundits have been complaining about the lacklustre quality of the campaigning in this election. But no wonder. Who wants to inherit this?
The US is probably already in recession, according to economists surveyed by Bloomberg. House prices are still falling, the banking system is crumbling and consumers are collapsing under the strain. In August, consumer credit fell by $7.9 billion – the most seen since records began in 1943.
In other words, US consumers borrowed more than they spent as credit froze up. And as US consumers stop buying, that hammers demand for goods in other parts of the world. That’s bad news for…
China
It may still be a future superpower, but don’t expect to see that tag bandied about as much in the next few years. China – and Asia in general, for that matter – is still very dependent on overseas exports, which makes a US recession a nightmare for them.
Most pundits, the IMF included, still expect China to keep growing, albeit at a slower rate. But Albert Edwards at Societe Generale – among the few economists to predict the current crisis in any shape or form – reckons China too will go into recession due to its dependence on exports.
US consumers have been the engine of global growth for years and no other country has the spending power to take over from them. As demand for goods falls, China risks rising unemployment and growing unrest.
And this slowdown also means less demand for raw materials. China’s slowing demand for iron ore has already sent shipping rates – a key indicator of economic growth – to their lowest in more than two years. This – alongside with a collapse in speculation – is why oil prices and commodity prices are diving. That’s not good for…
The commodity economies
Commodity-dependent economies are scattered across the world. Among the key ones that will feel the pain include China’s fellow Brics, Brazil and Russia.
Russia in particular is very dependent on oil income. Some pundits reckon that government spending has climbed so fast that even at these levels (still way in advance of where oil was just two years ago) the falling oil price is biting.
Meanwhile, Australia may come to regret not saving a bit more during the boom years. The country has had a similar house price boom to our own (and smaller neighbour New Zealand is already in recession as its own house bubble has popped).
Australia’s strong commodity exports always gave the country something of a safety blanket. However, with the boom collapsing and consumers heavily indebted, avoiding recession will be harder than they currently expect.
Even in the Gulf, petro-economies are pulling in the reins, making them less likely to spend money bailing out troubled Western financial institutions, for example. That’s not great for the likes of…
Europe
German finance minister Peer Steinbruck had a good old sneer at “Anglo-American” capitalism earlier this month. That was just before Hypo Real Estate, one of Germany’s biggest lenders, needed a €50 million bail-out leading the government to semi-guarantee savers’ deposits in a panicked weekend manoeuvre.
Turns out that certain European banks have been speculating at that good old Anglo-American capitalist casino at least as frenziedly – if not more so – than their US counterparts.
There’s been pandemonium across the eurozone as countries have unilaterally guaranteed savings, launched liquidity schemes (Spain) and had to bail out numerous other financial groups, from Belgium’s Fortis to French-Belgian group Dexia.
And the big worry here is that while Europe shares a central bank, German taxpayers may not be too keen to bail-out Spanish banks, for example, if it comes to that. If the euro survives this turmoil intact, it’ll emerge as a stronger rival to the dollar – but that’s by no means guaranteed. Of course, taxpayer objections to banking bailouts aren’t something that bothers the government in…
Britain
The UK has thrown up its hands and accepted that the banks are bust. We’re going to spend taxpayers’ money on them until they stop being bust. That may take some time.
Now, to be fair to the government, if you’re going to bail out a banking sector at all, this way makes much more sense than the somewhat half-hearted way the US has gone about it.
But as the fate of Iceland shows, when a government takes on its banking sector’s debts, it shifts the credit and confidence risk to itself. That’s a big gamble for an already heavily indebted country to take – particularly when it could be heading into one of the worst recessions in living memory.
Is anywhere safe?
So if I had to choose one economy to invest in at the moment, which would it be? Well, regular readers won’t be surprised at this, but it has to be Japan.
It’s facing plenty of the same problems as its fellows in Asia. Exports are important to the Japanese economy, which looks as though it’s going to slip into recession again before the end of the year.
I suspect the recession will be shorter-lived than those in the US and the UK, but even if not, Japan has one key advantage. Its stocks are now the cheapest in Asia, if not the world.
According to Bloomberg, on Thursday, the average price-to-book ratio for shares on the Topix index fell to 0.98, the lowest level since at least 1968. If a price-to-book ratio is below one, it technically means that if the company was shut down, and all its assets sold off, shareholders would still make a profit.
Now Japanese stocks have been cheap and getting cheaper for a long time – it’s something I’m painfully aware of, having backed Japan for quite some time. But not only are its stocks cheap, but its banks are solvent too.
That’s not something you can say for many developed economies right now. My main advice for your money right now is to overpay on your mortgage – but if you’re really in the mood to go get back into the stock markets, I think Japan’s the place to go.
By John Stepek
