Are we headed for a recession?

22 January 2016 3:59 pm

That’s the big question now following the January plunge in stock markets. The dreaded r-word is popping up everywhere in tweets and blog posts.

The big worry is China where pessimism has driven stock prices down 40 percent since June. Then there is the collapse in oil price. Oil company profits are plummeting, so oil company shares are plummeting, and that is dragging down the whole market. Investors are also selling shares of companies that may have exposure to the oil industry, like certain banks. And the price of oil has now fallen so low that investors are also worried that it could mean global economic growth is much weaker than expected, which could hurt all companies. This latest plunge in prices to under $30 a barrel has investors worried that oil prices are falling because global growth is slowing, as businesses and consumers in many developing countries, particularly China cut back on spending.

And then there is the expectation that the Fed will raise interest rates again. which basically means an end to cheap money.

The latest IMF forecasts, while cutting back its projections for economic growth, has all the rich countries growing at a pace. No chance of recession there.

Then again as The Economist points out, the IMF has a pretty poor track record. It analysed all of the IMF’s forecasts going back to 1999 and found there were 220 instances in which an economy grew in one year before shrinking in the next. In its April forecasts the IMF never once foresaw the contraction looming in the next year. Even in October of the year in question, the IMF predicted that a recession had begun only half the time.

Still, there are plenty around who say it's not as bad as people think. The chief of the Nasdaq exchange, Bob Greifeld, says the stock market turmoil is an overreaction. Richard Branson agrees. And a closely watched survey of economists, compiled by the Philadelphia Federal Reserve, is pretty upbeat about 2016, predicting gross domestic product will grow at a 2.6% rate, the fastest pace since 2006. Barring recession, pain should be limited to correction,” says Charles Schwab’s Liz Ann Sonders.

Still, let’s remember those soothsayers weren’t predicting a recession at the start of 2008. They didn’t realize that one had already begun. Recessions are usually difficult to spot until they have already begun.