Recession indicators adding up
15 August 2019
Indicators are currently accumulating that point to a recession. The most alarming warning sign is the US yield curve which plots the yields of Treasury maturities.
“The longer you loan Treasury your money, the higher you would expect the yield to be, so the curve looks like an upward slope; it’s been flattening out all year and looks more like a yield pancake”, says Paul Kane, Business Advisory Services Partner at Grant Thornton New Zealand.
“Over the past 50 years, every time a yield curve has inverted, a recession has followed within a year or two; The Bank of America is now predicting a 30% plus chance of a recession in the next year.
The New Zealand Reserve Bank is similarly pessimistic, dropping the official cash rate down to 1%, a move that took almost everyone by surprise.
“That suggests the Reserve Bank is predicting tough times ahead; it’s pre-emptively doing what it can to stimulate the economy,” says Kane.
Other indicators include high gold prices, low business confidence, and our key trading partners are facing significant uncertainties.
“China is staring down the barrel of an ongoing trade war, the UK is grappling with Brexit, and the US has a weakening manufacturing sector and falling industrial commodities.
A US recession would hit New Zealand through trade channels as America buys less, and impact our supply of foreign capital as overseas investors pull their money back home to what they perceive as less risky places.
“It could also hit us from the side; if Australia goes into recession we can expect to be dragged along for the ride. On the flipside, if Australia skates through relatively unscathed, we could probably get off lightly as well. It happened during the GFC and it could happen again. That storm caused enormous damage but only brushed by our region”.
Storm warning for Kiwi
“Of course, it’s important to reiterate that the storm might not hit at all. We’re in new territory when it comes to traditional economic indicators; interest rates are incredibly low, inflation has been unresponsive to the usual tools, and low employment hasn’t lifted wages,” says Kane.
“Whether a recession makes landfall in New Zealand or not, there’s no harm in shoring up your financial position, both personally and in your business. Consider what your position would be if sales took a serious dive; if one of your key markets falls over, look to build sales in alternative regions to maintain your profitability; ensure you can comfortably service your debt; know where you could cut back if you need to trim your expenses, and review your systems to see if you can improve cashflow”.
“The storm warning has been issued; there’s no need to panic yet, but you might as well be prepared”.