It’s now more than 10 years since the subprime mortgage crisis in the U.S. forced banks around the world to stop lending to each other as fears rose over the unknown quality of balance sheets.
Within months, factory output and trade collapsed, forcing unemployment to rise quickly.
While central banks and lawmakers acted to oil the wheels of finance, the recovery has been fragile and expensive. The prospect of another global recession is real with obvious economic slowing in the U.S. and the largest economies of Europe and Asia.
CNBC looks at some of the situations around the world that could soon create yet more political and financial stress.
“When America sneezes, the world catches a cold,” so the saying goes. And as the effects of a President Donald Trump’s $1.5 trillion tax overhaul begin to tail off, the U.S. economy is showing signs of a sniffle.
From April to June this year, business investment fell by 1% when compared to the same quarter in 2018. Additionally, consumer confidence slumped by the most in nine months in September. Expectations among consumers for the short-term outlook also fell sharply in the same month.
Then came a data set that made everyone sit up and take notice. One gauge of U.S. factory activity suggested that manufacturing had dipped to its lowest level in 128 months. That number appeared to trigger an 800-point loss on the Dow Jones Industrial Average over two days. Corporate profits are stumbling too. The S&P 500 as a whole reported a fall in earnings in both the first and second quarters of 2019.
The Fed now expects growth this year, as measured in U.S. gross domestic product (GDP), to come in at 2.2%, well below the Trump administration’s long-held 3% target.
Countering the argument are robust retail sales in the United States which continue to exceed forecasts as well as historically high levels of employment and disposable income.
For the White House to hit its headline economic target as it heads into an election year, it will hope that any fear of the future is outweighed by the American consumer’s continued desire, and ability, to spend.
China has fueled its economy by loading up on debt and the numbers have gotten breathtakingly large. The Washington-based Institute of International Finance (IIF) has estimated that in the first quarter of 2019, the total amount of corporate, household and government debt in China hit an eye-watering 303% of GDP.
The report said Beijing’s attempt to rein in non-financial corporate debt had been rather defeated by borrowing in other sectors which had brought China’s total debt pile to more than $40 trillion.
China has said time and again that its borrowings are manageable, but policy levers are hampered by the risk that choking off further debt could accelerate the slowing of economic growth that is already underway.
Moody’s ratings agency confirmed China’s A1 debt rating in July this year but warned: “Episodes of financial stress for some local banks or state-owned enterprises (SOEs) are likely to continue to test the capacity of the central and regional governments to prevent contagion.”
Over the last decade, China has accounted for about one-third of global growth each year. Any hard landing for the economy would immediately sound alarm bells in other parts of the world and investors would rush to protect assets.
Andy Rothman, an investment strategist at Matthews Asia, said in March that Chinese debt is “a serious problem” but is unlikely to run the risk of a hard landing or banking crisis.
Rothman said that while China’s main problem is corporate debt, which has steadily risen since the 2008 global financial crisis, most of the borrowings were taken out by state-owned enterprises from state-run banks.
