Global market indicators suggest possible recession in 2016
For months, economists and experts observed as global markets slowed down and oil prices continued to drop. In the summer of 2015, some began raising concerns that the economy is not on a good path. The first month of 2016 passed, and the situation did not seem to be getting better.
On the contrary, news from global markets caused quite a lot of stress as concerns grew louder and more numerous.
The value of S&P 500 has been falling since Aug. 17, 2015, when it closed at 2,102.44. Eight days later, the index lost almost 300 points. It did not begin recovering until the end of September, though the index began posting losses by Dec. 30, 2015. On Feb. 8, the index was down to 1,853—slightly lower than the August drop.
NASDAQ Composite is showing a similar pattern; the index began dropping on Aug. 17, when it closed at 4,566.37. It has reached a low eight days later, and though recovering to its August performance, the index dropped once again to 3,960 by Feb. 8. Unsurprisingly, the Dow Jones Industrial Average saw the same pattern, losing 1,682 points in the eight aforementioned August days. Despite short recovery, the index is down once again to 16,027 by Feb. 8.
The behavior of the three indices sparked many worrying headlines, including Business Insider’s “Wall Street’s deal machine is shutting down.” To some, these worries have no grounds. Others have been pulling out of the stock market since the indices reported its first major losses back in August. Both Citibank and JPMorgan predict that a recession is likely to happen between 2016 and 2018. Citigroup predicted a 65-percent chance of a recession in 2016.
JPMorgan’s economists predicted a 23-percent chance of a recession in 2016, 48-percent in 2017 and 76-percent in 2018. When asked about Citigroup’s predictions by Congress’ Joint Economic Committee, Janet Yellen predicted a 10-percent chance that a recession will happen in 2016. But there are other factors to take into account when considering the possibility of the recession.
The most obvious and worrisome issue is the decline of oil and gas prices. As of Feb. 8, WTI Crude Oil prices stood at $29.69 per barrel, with some speculating that the price could fall even lower. CNNMoney pointed out that a “dramatic downfall continues to alarm investors who fear it signals that something isn’t quite right about the health of the economy.” Looking back, one can observe a worrying comparison; the last time Crude Oil saw such a drastic drop in prices was in mid-2008. Another factor contributing to the possibility of a recession is China’s recent economic decline. One look at the Shanghai composite index tells a story that is more dramatic than the three aforementioned U.S. indices. The index has been facing steady decline since June 12, with close to no recovery.
As The New York Times also points out, the country has to deal with “troubled” loans, a term used to describe loans that are difficult for the creditors to repay, that could exceed $5 trillion—or half of China’s annual economic output. “Official figures show that Chinese banks pulled back on their lending in December,” the New York Times article explains. “If such trends persist, China’s economy … may then slow even more than it has, further harming the many countries that have for years relied on China for their growth.” The more difficult the economic situation becomes, the harder it will be for banks to take care of these troubled loans, thus contributing to economic troubles.
The situation in Europe does not look much better, as some of the biggest banks in Europe are underperforming. Most notably, Deutsche Bank’s shares dropped a record low, closing at $16.88 on Feb. 8, raising concerns as to whether Germany’s biggest bank—along with others on the continent—can sustain the economic strains.
Even with the case of the United States and the Federal Reserve, the issue is somewhat complicated. Because the interest rates were just raised after prolonged deliberation, it may be more difficult for Yellen to admit that the move was a mistake.
The last thing worth considering is the Baltic Dry Index, which helps assess the costs of transporting materials by sea. In recent months, the BDI went from bad to worse. Though the index has been going up and down for years, the 2016 graphs are showing the index at its five year low, currently standing at 293 points in comparison to the 1,200 points of August 2015.
As the Daily Reckoning explains, people often glance over the BDI without giving it much thought. But because it is not easily influenced by individuals, it is a fair indicator of how the global economy is doing. Based on this explanation and BDI’s recent numbers, the economy does not seem to be doing well at all. The author of the article puts the situation in simple terms: “shipping rates are plunging because the global economy is too.”
While it is hard to predict whether a recession will happen anytime soon—if at all—the aforementioned circumstances point to economic troubles ahead.