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Mar 2, 20249:39pm

End of a cycle: how and when will the next recession come

Iganacio de la Torre, chief economist of consulting firm Arcano, underlined yesterday in a presentation that recession is not the same as “great recession”, like the one that started in 2008.

Jan 11, 2019 — 4:00pm
Iria P. Gestal

End of a cycle: how and when will the next recession come



Recession is here. After years of getting short in its growth forecasts, international organisms like the World Bank or the International Monetary Fund close a fiscal year of constant discounts in their predictions, in which they reveal the numerous threats global economy is facing. But, what is going to be the trigger and which countries will suffer the most in the upcoming recession?


In the first place, everything indicates that it will not be like the previous crisis by far. “A recession is two quarters of fall in a row,” explained Ignacio de la Torre, chief economist at Spanish consulting firm Arcano.

What we had in 2008 was a great recession, result of the addition of a financial crisis, a real estate crisis and a recession; now we are not in that setting”, declared the expert.





At a global scale, the largest risk is a debt crisis, especially in the emerging markets. Today, the global debt is 2.3 times the Gross Domestic Product (GDP) facing the multiple of 2.1 in 2007, and the greatest risk resides in corporate debt.


However, while developed countries reduced its debt of 1.8 times to 1.6 times the GDP, in emerging it went from 0.4 to 0.7, what implies more than 100% of the growth in global debt comes from these markets.


The executive also alerted about the dangers of self-fulfilling prophecies “if 70% of the financial managers in the United States think there is going to be a recession, and another two indicators point at that direction, it is likely to happen,” stated.



European Union, despite the Brexit

In De la Torre’s opinion, the European Union is not too exposed to a future crisis. About the evolution of Germany and Italy in the third quarter (the German GDP stepped back), the one of Italy came to a standstill), De la Torre underlines that it is temporary.


“Germany is very much linked to exports and it slightly suffered the impact of trade downturn, but it is not something structural,” comments the expert. Regarding Italy, on its part, he noted that “even the less able politicians notice that for every triviality they say the risk premium goes up, they have to pay more, and there are just three sectors where money can be taken: pensions, health and education, and that takes away votes”.


About the future of the United Kingdom, De la Torre thinks that, if the deadline for the Brexit arrived, an extension and a “Norwegian-style” solution would be agreed. In either case, a no deal setting would have an impact of at least 0.2 in the Spanish and European GDP, according to Arcano’s estimations.







China will drag the emerging

“The world’s centre of gravity shifts again towards the East, where it actually was around the 1st century,” commented De la Torre. If the divide the world into three thirds, America has 1 billion people, Europe and Africa have another 1 billion, and Asia has 5 billion. China and the emerging generate two thirds of the global growth, even though not from the stock.


Therefore, China’s weakness is one of the biggest problems at a worldwide scale. China is responsible for two thirds of the growth of the global debt, the investments increase at its lowest level since 1998, the first from which there is available information, and the consumption is falling.


The economy of the Asiatic giant is, according to De la Torre, “overinvested”. “It grew in based on amphetamine and the credit still is exaggerated despite the fact that the Government got their hands on it,” noted.





De la Torre considers that China will be the one to give in the negotiations of the trade war, because “it does not have an ace upon its sleeve,” and underlined the exchange of threats with Trump that has begun to affect in the country’s exports.


Another one of its great threats is the real-state bubble. The symptoms? De demand has a bad quality (only 30% of the houses are first home) and the prices in cities are already decreasing. “The bubble will go off and, like it happened in Spain, half of the banking can disappear,” added. In this context, the only way the Government has to give a little boost to the economy is devaluating the yuan.


The United States, recession in 2020

“The United States will enter recession in 2020,” pointed out De la Torre. The chief economist from Arcano was that categorical while talking about the world’s first power, making emphasis in margin falls and monetary policies. In first place, the margins are going down, due to the wages are growing less than productivity in the country, the opposite of what happened since 1974. Moreover, the so-called underemployment, that is, the people that is working part-time and who would like to work full-time, and which if it is a lot it holds back the wages growth.





For the first time after many years, there are more work vacancies, approximately 6.5 million, than unemployed, which are around 5 million,”, explained De la Torre. The automatization of employment is not a problem: it is estimated that, on a global scale, 75 million positions will disappear, though another 130 will be created by robotization.

Another one of the threats of the North American threat is the little margin of manoeuvre by the Federal Reserve Bank. With a recession, the FED lowers the rates, by 5% on average.


Now, it barely has room to reduce them by 2.2%. In fiscal politics there is not much flexibility, as the deficit is already “as it were in the Wold War”. “The FED is carrying on a liquidity absorbing operation, something its president calls the automatic pilot, and there are already traders that claim that it will lower the rates, instead of increasing them as it anticipated,” said De la Torre. If the FED finally changes its rhetoric, it is possible that the euro gets closer to a parity with the dollar at the end of the year. 

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