ETFs – what’s all this talk of a recession?
30 Oct 2015
There’s been a lot of talk recently about a new Global Financial Crisis, caused by a crash in the Greek, Chinese, and now Indian stock markets. Here is Canstar’s broad summary of the situation, and what it might mean for Australian ETF investors.
Fearful predictions of a global recession
The current global thunderstorm centres around the Chinese economy. Barclays recently predicted we should expect the Chinese economy to slow to growth of just 6% in 2016, and one JP Global Macro Fund analyst says we can expect much less, at 5% growth in 2016 and possibly even slower growth in 2017.
Canstar has reported previously on why the Chinese stock market is falling, and the fact that China is our largest trading partner and their collapse would seriously affect our economy. However, a Chinese crash could affect more than just Australia.
Events in China – and the concern about their spillover – were stated to be the main reason behind the US Federal Reserve’s decision not to raise their national rates.
And China is not alone in its struggles. The Indian economy has also been slowing, with their inflation falling at a rate of 4.95% per year – the lowest in 40 years. We won’t even mention Greece.
The International Monetary Fund has also lowered its forecasted global growth for 2015 to 3.3%, with IMF Chief Economist Olivier Blanchard labelling it “a period of low growth”. The benchmark for a global recession is 2% growth.
Top Citigroup economist Willem Buiter was quoted as saying there was a “high and rapidly rising risk” of a new recession as the global economy slowed sharply into 2016. He gloomily predicted that global policy-makers would move too slowly to be able to avoid another GFC.
Why we should still be optimistic
Top economic researchers from Lombard Street Research say these fears are overblown. Despite China’s slow-down, the economies in the USA and Europe are doing just fine, proving themselves to be more resilient than expected.
The main factor differentiating this crash in China from the crash in the USA that caused the GFC is that China’s credit bubble was largely financed by domestic investors rather than international investors. This means that unlike the GFC, this financial crisis is unlikely to wipe out every other economy that had invested in the country.
Lombard Director Matt Williamson says growth has slowed but it has not entered a recession, since we’re not yet going backwards. He said 2016 won’t be easy, but it will be manageable.
“We expect a slow-burn emerging market crisis. While the shock to global GDP is potentially large, certainly larger than in 1998, the impact on the US and Europe looks manageable.”
Mr Williamson pointed out that direct trade and financial links to China in the USA and Europe are still fairly small, and lower oil-import prices should help consumers and economies overall.
What the current situation means for ETF investors
Currently, ETF investors have slowed their investing but not pulled out altogether. This is good news.
Mr Williamson said, “For a global recession in 2016, we would need to see a much more extreme deterioration in investor sentiment. While possible, that is not a likely outcome.”
ETF investors should find out where their fund manager is placing their investment, to be sure that they are still investing with the appropriate caution for such a time as this.
