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This is the dreaded question the pubic does not want to know the answer to. Is the world economy in, or headed towards a recession?
Only 8 years ago, the world economy sank into the worst recession of all time as markets crashed, unemployment rapidly grew, houses and lives were lost while the bulge-bracket CEO’s treated themselves to massive tax-payer bonuses.
Nonetheless, over the years, the economy has been steadily recovering due to government intervention, regulatory reform of policies and quantitative easing, giving rise to consumer and business confidence and encouraging income generation in the economy along with a fall in unemployment.
However, in the last couple of years, the economy has begun to stagnate and most recently, decline, owing to the following reasons:
– European crisis (Greece)
– Fall in Oil prices
– China’s stock market crash
– Rising world debt
– Monetary policy reforms
These factors have led to the world questioning the coming of another global recession since the start of 2015 however, the concerns seem to growing stronger and stronger in 2016 as the situation has gone from bad to worse as
world markets have taken a massive dip and economic growth has saturated. This can be depicted by the S&P 500, which has fallen to its worst performance in history as well as analysing the fall in various world currencies.
A recent poll of Wall Street economists put the chance of a recession occurring in 2016 at 21%, up from a year ago, but still relatively low. Furthermore, many of the key measures of the U.S. economy, namely the unemployment rate, are below 5%, which is still favourable and to some extent, quashes rumours about a world recession.
Although the talk about recession is worrying world economies, a lot of analysts believe that we are in/ heading towards, an ‘earnings recession’. This type of recession is what Wall Street claims to be a situation where corporate firms still record profits, but which are lower than that of the previous years.
Lower profits from the previous year isn’t necessarily a negative news but it sends out distress signals and creates uncertainty amongst investors and economists, which makes the stock market volatile, as it is widely assumed that an earnings recession is usually accompanied by a global, economic recession.
Investors who are looking to invest in 2016 should look beyond this temporary earnings recession and focus more on the real economy as the performance of the world economy in 2016 would be an indicator of whether what we saw in 2015 was a temporary earnings recession or whether we are in-fact headed towards another devastating economic recession. Only time will tell.