Will there be a recession in 2020?

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Will there be a recession in 2020?

Before we start talking about whether will there be a recession in 2020 or not. Lets first understand what

is ‘Recession’. According to Wikipedia – Recession 

What is the meaning of recession?

‘In economics, a recession is a business cycle contraction when there is a general decline in an economic activity’.

So why do we think recession will happen in 2020? There are multiple factors that influence whether will there be a recession in 2020 or not.  As we know a recession is a decline in economic activity, let’s see why there are already signs that there will definitely be a downturn in economic activity.

In this article, we will look at leading indicators around the world but mainly the US as a global recession is mostly led by the United States which propagates to different countries.

The facts presented here will help you understand whether the impact on the global economy or we are already in a recession in 2020.

1. Coronavirus impact on global economy

The biggest challenge that the world is facing is the impact of Coronavirus. The virus itself may not be that dangerous as it is said that the mortality rate of the virus is very low(3-4% as od 6th March 2020 according to WHO report).

The issue here is not the virus; the Issue is the restrictions that are imposed by countries all over the world to control the virus. The majority of the countries have banned travel from/to their country to control the virus. This will impact the global trade as the less the people travel the less the economic activities are. let’s take a simple example:- 

Whenever you travel for a holiday; what is the impact

  1. Its revenue source for Airlines/Travel companies
  2. It’s a revenue source for hotels
  3. Its a revenue source for restaurants/associated businesses of the destination. 

Now each of these businesses has a direct and indirect economic impact. when suddenly no one is traveling across the world; all of these businesses take a big hit. All the people depending on these businesses will face huge economic impacts. There will possibly be large amount of layoffs.

According to the World Travel and Tourism Council (WTTC), the sector now directly accounts for 3.2 percent of the global economy, and indirectly for 10.4 percent (as well as 9.9 percent of all jobs).

Now if the travel & tourism industry comes to a grinding halt, then you are talking about a big part of economic activity slowing down.

Consider this, All the major sporting events are canceled.

let’s take an example of one popular sporting event, The premier league in the UK.  Premier League clubs generated £3.3 billion in tax revenue and contributed £7.6 billion to the economy during the 2016-17 season and it supports around 100k jobs. Now the premier league games stand canceled, consider the impact of this in the UK’s economy.

From the above data; it’s clear that the impact of Coronavirus on the world economy is huge. The impact on the economy is not yet visible as the virus started spreading outside China recently. 

There is an interesting report by nytimes on how Coronavirus can impact US economy.

So Will there be a recession in 2020 because of Coronavirus?

2. Crash in Crude oil prices

Most people believe that a crash in crude oil prices is good for world economy. It’s good when oil prices fall but not like what is happening now. The crude oil prices have crashed 50% from the peak.

Crude oil prices

Source – www.investing.com 

According to an Investopedia report ; US is now a major exporter of crude oil globally. But for the US shale oil to make any money the crude oil prices should be above $45 dollars a barrel. If not all the shale oil companies start making losses. If they start making losses consistently then that will create bankruptcy in most of the oil companies leading to a knock-on impact on US economy.

Although the lower crude oil prices are blessings in disguise for the Indian economy as the lowe crude oil prices India save a lot of oil import bill but the global impact around this will nullify the Indian advantage.

3. US 10 year treasury yield at historic low

US 10 year yeild

For the first time in history, the US 10 Year Yield has gone below 1%.  According to an Investopedia article. The impact of US 10 Year Treasury yield is – If the 10-year yield is high then demand of the treasury price is low that means investors are not looking for safe-haven investments but if the 10-year yield is low then there is a huge demand of Govt bonds that means investors are looking for safe-haven investments where returns are guaranteed.

This happens mostly when there is economic uncertainity.

4. Us interest rates at 0%

 

Interest rates are a great reflection of growth of an economy. When any economy performs well then the common public earns well which leads to good spending and then causes inflation. To tackle the inflation the interest rates are kept near the inflation level to make the currency relevant.

The US Fed has cut the interest rates to 0% . Consider this the US interest rates were at 2.5% last year. It was at 1.75% in Feb 2020. The Fed has done 2 emergency interest rate cuts and brought down the interest rate level to 0%. This may be the first time in history when the interest rates were cut so fast.

This means only one thing; The US fed is anticipating a huge decline in GDP and they are pumping in money to keep the economy afloat.

5. US unemployment going from historic low to historic high

US unemployment rate

It’s good news that the US unemployment rates were at historic low in Feb 2020 but since the lock down started for COVID-19 the job loss claims surged by historic numbers.  COVID-19 situation gives all the ammunition to the employers to start laying off people as their businesses start getting impacted by the Coronavirus. We may see the unemployment rate shooting off when the Coronavirus related impacts start showing in the economy.

6. Stock markets crashing

dow jones

Stock markets all over the world are crashing. Down jones had its sharpest decline ever and lost around 25% in record time. This is mainly due to the index shooting up almost 5 times after the low it made after the great recession of 2008-09. 

Do read – The March 2020 market crash that nobody wanted

7. Volatility index near record high

US volatility index

The CBOE Volatility index is at a record high. The last time such volatility was seen was in 2008-09 great global recession times.

What should an investor do in the time of recession?

Remember one thing, The world has emerged from a lot of bad news and bad situations. This situation shall too pass. The key thing at this time to take care of yourself and be safe. Be cognizant about investments, do not jump in invest in the market at one go just because the prices are low. 

Keep in mind that in 2008 the Nifty fell by as much as 60% before it settled down when the great global recession happened. so Invest your money in the SIP manner. Read – What happened in 2008 stock market crash?

Also remember, fortunes are made in the recession. If the market gives you an opportunity- take it with both hands. keep continuing your SIPs. If you don’t have a SIP then this may be the time to start one!

You can start looking at buying good quality stocks or start investing in mutual funds.

Will there be a recession in 2020? – Conclusion

So, Will there be a recession in 2020? Well, no one knows for sure but looking at the above data, It’s quite clear that we are looking at many difficult times ahead. The impact of the CoronaVirus is not fully known yet. 

People always try to predict the next recession but most of the time they fail. But the data that we are getting now is compelling, If the world can avoid a recession in 2020 then it will be a miraculous effort by all governments around the world. 

The large scale bans around the world will create a great economic crisis and maybe a global recession. The speed at which all central banks are cutting rates only signifies one thing- we are headed for slower growth or no growth at all.

The world is desperately looking for good news around Coronavirus; if we don’t hear any good news in few weeks and if the spread of Coronavirus goes on like what it is doing now then we are probably looking at very difficult times ahead.


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