Are we heading towards global recession?

By Mark Burgess, Columbia Threadneedle CIO, Emea

With markets recording their worst January for many years, the prominent question is whether setbacks in the financial markets will lead to global economic recession as they did in 2008? Are we facing another situation where the fallout from financial turmoil threatens underlying growth?

I don’t think so. The first few weeks of this year show us something that we have known all along but perhaps conveniently forgotten: that we are and will remain in a low growth, low inflation and low interest rate environment for some time.

In the aftermath of the Global Financial Crisis, in order to continue on a growth path deemed acceptable, China turned on the credit taps, and credit grew at twice GDP for several years. The well-trodden path of investment-led growth drove the economy forward as China invested heavily in infrastructure.

This growth naturally sucked in much of the world’s resources, driving commodity prices higher. As debt rose, China inevitably slowed down spending and began last year to attempt to rebalance its economy towards a more Western-like consumption model, while reigning in the consequences of its over leverage.

It is hard to truly know the level of misallocation of capital that took place whilst the credit taps were turned on to full. The effects of China’s credit-fuelled debt binge and its rather clumsy attempts to grapple with its slowdown and rebalancing began to unsettle markets last summer and their naive implementation of economic policy measures has continued to undermine investor confidence in the Chinese economy and financial system.

The global consequences should not be underestimated. Global production of commodities, particularly industrial metals and energy soared as producers invested heavily in production. With ever higher prices, companies explored uneconomic places and forms of production, borrowing to finance their growth. Nowhere was this better typified than in US shale oil, an expensive and difficult means of extracting oil from the ground.

With oil prices hitting steady highs, significant capital was invested in US production. Roll forward a couple of years and with Chinese demand collapsing, oil prices have also collapsed. The consequences for the US shale oil industry are both immediate and devastating.

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