5 signs another huge financial crisis could be coming in 2016

The clock is ticking

Statistically, there’s usually a global recession every eight years or so, meaning – as the last recession began seven years ago in 2008 – it appears to be only a matter of time before the world’s economy comes crashing down. But when will it be? Here are five signs 2016 will be the year.

1. Chinese instability

Chinese trader

Analysts have been worried about the state of China’s markets since the summer when what is known as the “Great Fall of China” began to occur. Chinese stock markets plummeted 8.5% - or an entire year of gains - in response to data showing the country’s economic growth had slowed. Around the world, 24 August became known as “Black Monday” as markets in Asia took a turn for the worse, followed by Europe and then the US. The FTSE 100 lost a whopping £75bn on opening.

Signs of problems in China had been apparent – though largely ignored – for years, with its large debts, higher than any other developing nation, being a key sign there are grey clouds looming for the world’s second-largest economy.

In the past, China had been more a follower of global trends rather than a leader, with the US, which has a 25% bigger economy, being the main driver of some of the world’s largest recessions. However, there are now signs China might be about to become a catalyst. The US might have the largest economy, but China is closing in and contributes more to global growth than any other nation. Previously dependable Chinese double-digit growth, however, has slowed to single digits. Combining slow growth with the country’s debt binge could spell recession for China, as taking on a lot of debt in a short space of time is a pretty good indicator that trouble is on the way.

2. Oil prices

Oil barrels

Thanks to an inflation rate of around 5% in the past, Brits are used to the price of things we buy going up. So it seems strange to reach the fuel pump and see petrol for less than £1 a litre. It’s not the case everywhere yet, but that is something we have seen in recent weeks, and is set to become far more common if the price of oil continues to fall like it has been doing.

Last Thursday, Brent crude oil fell to below $30 a barrel for the first time in 12 years and, as is often the case, self-perpetuating fear gripped the global markets causing a whole lot of pessimistic trading.

While the FTSE 100 suffered a 1.2% drop at the start of trading that day, on the whole, falling oil prices are good news for many non- or low-oil-producing economies like the UK, the US and Japan, where a large part of spending is on oil and oil products. Simply put, for countries that import oil, everything becomes cheaper – food and clothing are cheaper because transport costs are lower. This applies in some large or small way to almost every good or service and shows up on economic figures as a depressant to inflation. It gives us spare cash in our pockets which we’re more likely to spend than save, given low interest rates, which is a tidy little stimulant to our economy.

But for every country that benefits from a lower oil price, there of course is a flip side. Oil producers such as Saudi Arabia take a hit, with everything that comes with that - reduced disposable income, a fall in consumer spending and a fall in confidence. As anyone who has even glanced at stock market listings will know, confidence is key, and economic issues aside, it’s often simply a lack of confidence that causes disaster.

3. Currency

Dollars

Currently, the pound isn’t faring hugely well.

“There’s been a pretty negative mood around Sterling since the beginning of December and, in the short term at least, that negative mood looks like it will continue a bit as the market adjusts to the fact the Bank of England are probably going to leave rates on hold now until next year,” Scott says.

Heightened risk aversion due to a turbulent stock market means the looming prospect of a Brexit carries additional weight at the moment, he says.

“The referendum is perceived as a risk to the health of the UK economy. And therefore because the market is looking at any sort of asset class, currency, commodities, stocks, and assessing that there is a risk attached to whatever that is and they’re less likely to hold a position in that. That’s one of the factors weighing on Sterling.”

If a deal is done by Prime Minister David Cameron in February and it tips the polls in favour of staying in the EU, that tension might ease, he says.

Outside Britain, while shockwaves from the Chinese economy are felt around the world, it’s the US that holds all the cards currency-wise, with global dependence on the dollar.

The US Federal Reserve has been incredibly cautious about increasing interest rates. After a small raise at the end of last year, analysts predict the institution will hold off as much as possible, possibly not raising rates at all in 2016.

However, if the Fed fails to think globally, there could be tears for nations which heavily depend on the dollar.

“As the US hikes rates, it makes funding in dollars more expensive for a lot of countries that rely on it,” explains Andy Scott, economist at HIFX.

“A lot of emerging market countries - companies and governments - have raised money in dollars. As the dollar has become more expensive, it becomes a much bigger problem in terms of paying off debt. It has a huge influence on the global economy.”

4. Climate change

Climate change protesters

This week is the start of the World Economic Forum in Davos, Switzerland. Prior to the event, the nonprofit organisation issued a report into the biggest risks to the global economy this year, called The Global Risks Report 2016. For the first time ever, it found climate change – and everything that comes with it - to be the number one risk to the global economy.

“Climate change is exacerbating more risks than ever before in terms of water crises, food shortages, constrained economic growth, weaker societal cohesion and increased security risks,” said Cecilia Reyes, chief risk officer of Zurich Insurance Group, one of the organizations that worked on the report.

She added: “Meanwhile, geopolitical instability is exposing businesses to cancelled projects, revoked licences, interrupted production, damaged assets and restricted movement of funds across borders. These political conflicts are in turn making the challenge of climate change all the more insurmountable – reducing the potential for political cooperation, as well as diverting resource, innovation and time away from climate change resilience and prevention.”

In fact, a failure to tackle climate change was likely to have a bigger impact than the spread of weapons of mass destruction, water crises, mass involuntary migration and a severe energy price shock, the report said.

5. It’s already being voiced

Emergency exit

The start of 2016 hasn’t been great for global stock markets. The FTSE 100 has lost 5.5% in a month. And that hasn’t escaped the attention of bankers, traders, economist and analysts who are starting to warn of a global crisis.

At the beginning of the year, RBS issued a note to clients with a warning of danger. It said: “Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” This was widely reported in the press as perhaps the first major vocalisation of a creeping concern many in finance are feeling. Of course, the whiff of smoke that has RBS customers desperately running for the fire exits, might well be a cheeky cigarette, rather than a sign the whole building is going up in flames.

However, it seems this pessimism has attracted another high profile commenter. Albert Edwards, strategist at the bank Société Générale told an investment conference in London last week: “Developments in the global economy will push the US back into recession.

“The financial crisis will reawaken. It will be every bit as bad as in 2008-09 and it will turn very ugly indeed.

“Can it get any worse? Of course it can. Emerging market currencies are still in freefall. The US corporate sector is being crushed by the appreciation of the dollar.”

So will this talk of doom catch on? “Confidence is always key,” says Scott.

“From the point of view of the consumer, if they’re confident about the outlook for their economy, it means they’re more likely to put that money to use in terms of spending. If the opposite is true, they’re more likely to save it and it’s that fine balance around confidence that will drive that behaviour.”

 

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