Recession
14 min read
What is recession?
The economy goes through cycles of peaks and troughs, just like the water waves. When the economy grows, its crest comes to a peak, declines to form the trough, then rises again. When the economy goes up, we are undergoing economic growth, but when it goes down, we find ourselves going through what is called an economic contraction.
By definition, recession is a significant, pervasive and protracted decline in economic activity. There is a popular rule of thumb that follows: if the economy contracts for two consecutive quarters, the country is said to have undergone a recession. Economists define a recession as an economic contraction that starts at the peak of the expansion that preceded it, and ends at the low point of the ensuing downturn. A recession can last as short as a couple of months, but the economic recovery to the former peak could very well take years, which is why the very thought of an impending recession in the near future strikes fear in most of us. There are also far-reaching implications that follow a recession, such as the decline in economic output, consumer demand and employment.
A glimpse into historical recessions
One of the greatest recessions in history would be The Great Recession that lasted from December 2007 to June 2009. It lasted a total of 18 long months and led to a decline of 4.3% in the US’s gross domestic product (GDP). The peak unemployment went as high as 9.5%, causing much suffering of countless families.
The nationwide decline in US housing prices triggered the global financial crisis, coupled with a bear market in stocks that caused the S&P 500 to be down a whopping 57%, making it the worst economic downturn since the recession in 1937-1938. This was largely because of the global investment flows into the US that had been keeping market rates especially low, encouraging unscrupulous mortgage underwriting and mortgage-backed securities marketing practices. Oil prices were also soaring to record highs by mid-2008 and subsequently crashed, depressing the US oil industry. The repercussions were dire, thus earning it the name of The Great Recession.
Most would also consider the pandemic to have triggered a sharp recession from February 2020 to April 2020, due to the severe economic backlash that took place on a global scale. Some might argue otherwise, because of its short duration of only two months. But this unprecedented COVID-19 pandemic spread to the US in March 2020, and the resultant travel and work restrictions caused employment to take a deep dive, hence triggering this unusually short but sharp recession. The unemployment rate spiked to 14.7% in April 2020, from 3.5% in February 2020. Thankfully, it had gone back down to 4% by the end of last year, thanks to the $5 trillion pandemic relief spending. Furthermore, quantitative easing by the Federal Reserve expanded its balance sheet from $4.1 trillion in the start of 2020 to nearly $9 trillion by the end of 2021, complementing a federal funds rate that remained near zero until March this year.
But here’s the current issue that has been heavily discussed in the recent months. By mid 2022, resurgent inflation has led the Feds to raise interest rates, and this significantly increases recessions risks. In fact, many experts are speculating an impending recession in the near future, while others beg to differ. With the erratic fluctuations in the markets, it’s hard to be sure of the future ahead.
The possibility of recession today
The United States
The US economy has shrunk by 0.9% in the last three months. This is the second consecutive quarter where the economy has contracted, with the first quarter decreasing at an annual rate of 1.6%. Based on the official definition of recession, the prognosis of the US economy should have been that of one undergoing recession. But apparently, it is not. A nonprofit, non-partisan organisation known as the National Bureau of Economic Research (NBER) takes into consideration several relevant factors and calculations before officially determining when the US economy is in recession. Right now, the NBER has not considered the US to be in recession. The White House has in fact pushed back calling the economy at present a recession, considering the role the economy will play in the midterm elections. Politics aside, there are indeed still factors deflecting the label of a recession, such as considerable job worth and incoming foreign business investments. As such, the current situation is rather unique.
The US is seeing the creation of almost 400,000 jobs a month and that’s not what we should be observing in a recession. However, we are unable to deny the fact that the economy has indeed weakened. Businesses have retrenched and the cost of borrowing has become more expensive than many can handle, with the Feds periodically kicking the interest rates up a notch. Bottom line, there is simply less money to invest now. There is growing concern about how long this job creation can last before these tightening policies start hurting job growth. Even housing in the US is beginning to take a dip as it cools in tandem with the rising mortgage rates.
However, not all is bleak. The mixed economic data is also revealing a rise in wages and people dining out at restaurants and traveling. Income overall did rise as well. Basically, consumer spending has remained strong, which is considered a positive data on the credit quality of the US citizens.
We do need more time to evaluate the fluctuating economic data before we can have a firmer take on whether to put the tag of recession on the US economy in the near future. Employment is part of NBER’s calculus, and as of June, the unemployment rate held steady at 3.6%, nearing its pre-pandemic low. But the economy is nonetheless slowing, with prices rising faster than ever in decades, and let’s not forget a cooling housing market with the Fed’s aggressive increase in rates. The last hawkish speech by Powell in Jackson Hole certainly doesn’t point us to a brighter future around the corner. But with this much uncertainty lingering in the air, we can try to be optimistic with the lack of clarity.
Europe
Unfortunately, optimism might not be possible for those of us in Europe. The euro zone is almost certainly entering recession as seen from the deepening cost-of-living crisis and gloomy outlook that is keeping consumer spending at bay.
The European Central Bank (ECB) is currently under a whole lot of pressure as inflation is over four times its 2% target, reaching a record high of 9.1% last month. Just Thursday, the ECB made the decision to tighten its monetary policy by increasing interest rates by 75 basis points, as predicted by many economists beforehand. Such an intensive move would only prove to add to the woes of the already indebted consumers. However, it doesn’t look like the central bank has much of a choice now. This rate hike was decided in a bid to ensure the timely return of inflation to the ECB’s 2% medium-term target. In fact, price pressures have continued to strengthen and broaden across the economy, with inflation predicted to only rise further in the near term. Upon a significant revision of the inflation projections, the ECB is now expecting inflation to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024.
The Russia-Ukraine conflict has affected the euro zone adversely. For the first time in 20 years, the euro dropped below 99 US cents on Monday after Russia announced that gas supply down its main pipeline to Europe would stay shut indefinitely. Gas prices soared as much as 30% on the same day, striking fear of shortages and reinforcing expectations for a recession, especially with winter coming up, and businesses and households are maimed by the sky-high energy prices.
S&P Global final composite Purchasing Managers’ Index (PMI) fell to an 18 month low of 48.9 in August from July’s 49.9, below a preliminary 49.2 estimate. Basically, any reading below 50 indicates contraction. Such an index lends itself to a fairly accurate prediction of the euro area entering recession earlier than pundits have predicted, led by the largest economy Germany, as we witness the euro zone enduring a longer three quarter recession. This prospect of recession has also battered investor morale in the currency union and it slumped in September to its lowest since May 2020.
Sentix’s index for Eurozone declined to -31.8 points in September from -25.2 in August below expectations of analysts for a reading of -27.5, The expectations index also took a tumble to -37.0 from -33.8, hitting an all-time low since December 2008, the peak of the financial crisis after the collapse of the Lehman Bank. Germany saw its services sector fall for a second consecutive month in August as domestic demand was pressured by rising inflation and waning confidence. Its economy is on the way to contracting for three consecutive quarters starting from the current one.
The services sector in France, second-largest economy in the euro zone, lost additional steam and could only muster modest growth, with purchasing managers expressing real concern about the foreseeable future. The Italian services industry returned to moderate growth but in Spain, activity expanded at the slowest rate since January, with companies anxious that inflation would weigh on their profits and on consumer demand. In Britain, the economy ended August on a much weaker footing than previously thought, as overall businesses also contracted for the first time since February 2021, indicating a clear signal of recession.
China
The eastern powerhouse is certainly not faring any better as well. China reported weaker-than-expected economic growth in the second quarter of 2022. The nation’s economy grew 0.4% in the three quarters towards the end of June as harsh pandemic restrictions battered the economic activities amidst the global economic slowdown. China’s economic growth slowed when COVID-19 struck at the end 2019, but the country’s GDP growth rate has rebounded strongly the following year in 2021 as China recovered from COVID-19 lockdowns, exceeding the government’s aim of 6% and expanding at 8.1% in 2021.
However, China’s economy slowed sharply to 0.4% in the second quarter of 2022, as opposed to 4.8% in the first quarter when the government reimposed stringent rules to control the renewed COVID-19 outbreaks. The second quarter GDP growth was the slowest pace of expansion since a contraction in Q1 2020. After the IMF revised its estimate for China’s GDP growth rate downward by 1.1% from its April forecast to 3.3% in July, worries about the country’s economic slump have increased.
Things are not looking great as the latest numbers from July show the situation is still not turning around. Factory production, investment and consumer spending all fell for the prior month. Urban youth unemployment was one of the most striking statistics as it shot up to 20%. This implies that 20% of the younger job seekers in cities of China are not able to find jobs. All these simply reflect how shaken up the people are by these incessant lockdowns.
Experts are also pointing to the 2008 financial crisis, where China, as a result of the massive stimulus then, eventually managed to achieve close to 8% growth in the year 2009. The financial implications are dire and we are actually seeing the signs now. Chinese households cannot get their apartments delivered on time, and people are threatening to suspend mortgage payments, implying that there will be a risk to the banking sector. The current housing crisis is also partly policy-made, when Beijing deliberately tried to engineer a soft landing of the property market last year. At present, the zero-covid policy has also largely contributed to the more recent deterioration of the property sector, evident from the Evergrande crisis last year. The initial aftermath of Evergrande was cataclysmic, but in the past couple of months, the situation has clearly worsened. We are seeing people being reluctant to purchase properties in major cities like Beijing and Shanghai, which is deemed to be a pretty much unprecedented scenario.
Bigger political challenges are also impending, and as of now, the situation is not looking too great for China. In any case, we do need to see how the government juggles with the current economic issues, the COVID-19 situation and their penchant for sticking to their political ideologies regardless of any challenges they face. Perhaps President Xi might have some surprise in store for us.
Asia
Thailand
Closer to home, we have Thailand also facing the threat of recession. The nation’s economy is primarily reliant on tourism. Prior to the pandemic in 2019, tourism represented roughly 11% of Thailand’s GDP. Thailand received about 40 million visitors a year and made more than $60 billion in income. However in 2021, there were only about 428,000 tourists arrivals, and its economy grew by only 1.5%, one of the slowest in Southeast Asia. It does appear that Thailand could possibly fall into recession. However, if China does reopen, there is a possibility for its economy to rebound completely, but the odds aren’t exactly high at present. Chinese tourists have accounted for a significant proportion of Thailand’s economy, and as long as they are not returning, Thailand will continue to struggle. Growth has been weak and inflation is high, with the country’s currency facing pressures. The Thai baht is currently hovering at around 36 baht per US dollar, and is down a whopping 20% from pre-pandemic era.
Inflationary pressures are also high, hitting a 14-year high of 7.66% in June. However, the Bank of Thailand has only hiked interest once in 2018, as core inflation or growth has not been high, hence the lack of urgency to tighten as aggressively. With global inflationary pressures coming in hard, it will not be surprising if inflation in Thailand continues creeping up.
Singapore
Back here at home, things are not looking all that great for us too. It is almost inevitable for Asia to escape unscathed if the US does fall into recession. The tug-of-war between inflation and recession in the US will continue as long as the Fed sticks to its hawkish stance on interest rates hike, and at present, that is indeed the case. Singapore is relatively vulnerable to a US recession because of our export dependency and small and open economy.
Being interconnected is a double-edged sword and presents itself as more of a bane than a boon when the world is in choppy economic waters. Due to our small domestic market, Singapore’s economy is primarily dependent on trade services, including shipping activities and cargo operations. Our nation’s trade-to-GDP ratio for 2021 was 338%, which is clearly high as this ratio is an indicator of how open an economy is to international trade. If the US were to slip into recession, we would certainly feel the “shock wave” as the ripple effect spans across different countries, with impacts cascading down to us.
Fortunately, experts are not exactly predicting Singapore to fall into recession anytime soon, and the downturn is likely to be shallow rather than a deep one. However, seeing how the US is currently facing a prediction of a likely recession, whether we will also be headed towards a long-drawn recession might actually depend on China’s COVID reopening since China is after all one of our largest trading partners.
Trader’s View
of market uncertainty or turbulence such as an economic recession. There are a number of investment securities that are considered to be safe haven, such as precious metals like Gold(XAU/USD), Treasury Bills (T-Bills) and currencies like the Swiss Franc (CHF) and Japanese Yen (JPY).
With the US dollar index reaching a new two-decade high, we will be expecting some retracement in the US dollar despite recent hawkish stance by Federal Reserve Chair Jerome Powell as the expectations of upcoming rate hikes of the Federal Reserve could have already been priced in. Gold (XAU/USD) is inversely correlated to the US dollar because gold is dollar denominated. Gold is also considered a hedge against inflation. With inflation at high levels, there should be a demand for gold in the current market sentiments. This is supported by the fact that current market sentiments may be slightly uncertain (i.e. Global political issues, war) which may boost the appeal of safe haven demand.
We shall explore the technical aspect of gold (XAU/USD).
As we can see from the above daily chart for gold, it is currently trading at around 1714. There is a strong support zone at around 1680 which we will be expecting it to hold for the time being. This is supported by 2 other technical factors:
1) There is a bullish engulfing as highlighted in orange. This is a confirmation for possible upside movement.
2) Stochastic indicator also shows a crossover at oversold level which may signal a possibility of upward movement.
Hence, we should be expecting gold to be bullish for the next few days to weeks. A good stop loss level will be below 1680 level, with a possible take profit level of 1800 resistance zone.
Let’s look into a weekly chart for gold below.
On the flip side, from the above weekly chart, we can see a “double top” formation with a neckline at around 1680. If gold price breaks the 1680 neckline, we could possibly see a further downward movement which in the longer term we may see it hitting 1300 zone based on technical analysis. Experienced traders will usually wait for a confirmation of price breakout before making any trading decisions.
