The 2008 Financial Crisis was attributed to easy credit to improperly assessed individuals, high debt leveraging, bad loans and a systemic crisis. Government bailouts and reducing the cost of money by the government were the emergency techniques used to prevent the world from going into a sinkhole from which it would never come back. Recently the Fed announced a marginal increase in the rate of interest. It cited the fall in the rate of unemployment as a one of the reasons to do so. True as that might be, the impact of the 2008 crisis is far from over. The festering sores of bad student loans, the new problem of China’s slowing growth rate and the availability of cheap oil all point to a global recession. In addition to this the war in Syria has caused to displace a large number of its people to Europe which is still reeling from its systemic crisis, particularly countries like Greece.
Slowdown in China: China that has been raging forward with its impetus on infrastructure was the biggest buyer of steel. China is now shifting its focus from manufacturing to services. There has been a steady slowing of its economic growth and the rest of the world fears that the dragon is inching its way to a recession. A recent report indicates that entire towns and cities that were being built have very few dwellers showing that the realty boom was not built on actual demand.
The condition of Europe is worrisome: All member states of the European Union are not equally strong and the divide between the strongest and the weakest is cause for concern. Italy, Greece, Spain, Ireland and Portugal have been undertaking austerity measures in order to revive the economy. This has led to a further fall in aggregate demand, without which the economies of these countries are unlikely to grow. There is resentment and discontent among European Union members, with Greece defaulting on its IMF loan.
Bad Student Loan Debt: The blog, The Hill reports that 44 million middle class families are shouldering student debt. It goes on to say “27 million are currently unable to make payments (they are in default, hardship forbearance, deferment, or otherwise delinquent). The student loan crisis looms over the American economy. The problem of student debt also means as students become young professionals they will consume lesser, reducing aggregate demand.
Unemployment rate stagnant: The unemployment rate has been largely stagnant. It has dropped to 4.9 in Jan 2016, from a previous 5% in Dec 2015. This is very marginal. Greece with its unemployment rates of 24%, Africa with 25%, Spain with 21% and Iraq with 16% show that recessionary conditions exist in various parts of the world.
Cautionary Fed: The Fed has been extending cheap money to stimulate growth in the economy. It has raised rates marginally by 0.25%. It may raise the rates further if it sees the economy improving. This increase in rate is the first in a decade. Janet Yellen, the Fed’s chairwoman has warned of turbulence ahead. She stated that US was facing economic conditions “less supportive of growth”. She continue to state,
“The economic outlook is uncertain. Foreign economic investments in particular pose risk to US economic growth. Most notably, although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China’s exchange rate policy and the prospects for its economy. This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth. These growth concerns, along with strong supply conditions and high inventories, contributed to the recent fall in the prices of oil and other commodities. In turn, low commodity prices could trigger financial stresses in commodity-exporting economies, particularly in vulnerable emerging market economies, and for commodity-producing firms in many countries. Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further.”
Downturns in emerging markets, falling commodity prices, low aggregate demand despite low interest rates and falling corporate profits are indicative of a recession heading our way.