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Are we on the cusp of a global recession bigger than the 2008 financial crisis?
| 02/11/2019
The recent rally in US stocks has created an opportunity for investors who suffered massive drawdowns in Q4 2018 to recoup some of their losses. However, many investors have a sinking feeling in their gut that the rally might not last long given the major risks facing the global economy this year.
According to a research report by Deustche Bank Securities’ chief economist Peter Hooper, the three biggest risks to the global economy this year could cause massive losses to investors and consumers alike. The three risks are ‘a no deal Brexit,’ ‘a surge in retaliatory trade hostilities between China and the USA,’ and a massive economic slowdown in China, which would have a massive impact on global economic growth.
Hooper believes that the global economy could witness a recession worse than the great recession of 2007-2008 that followed the financial crisis if all the three major risks actually happened (became reality). Firstly, if the ongoing trade spat between the US and China is not quickly resolved, the outcome could be a mild recession in the US, which would cause a global economic growth decline of about 1% over the following two year period.
Furthermore, rising inflation in China could force the People’s Bank to hike interest rates in order to stem inflation, which would sink the country’s economic growth prospects. The impact of the rate hike would be very similar to that of a prolonged trade war as it would also cause a percentage decline in the global economic growth rate.
There is also the looming threat of a no deal Brexit, which would disrupt trade activities in Europe leading to a half percentage point drop in the rate of economic expansion globally. Currently, the likelihood of all these events taking place is quite minimal, but cannot be ruled out, which is why investors should remain cautious and extremely vigilant to avoid being caught unawares in case these threats occur.
There are numerous risks facing the global economy in 2019 and investors should ensure that their portfolios are well balanced, while minimizing their exposure to the stock market.