Preparing for the inevitable recession

BY DENNIS CHUNG

Friday, August 23, 2019

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Recently concerns have arisen about a possible global recession, resulting from weakening economic indicators in the United States and China, declines in the German and United Kingdom economy, and an inverted bond yield curve. The latter is seen as an indication of impending recession, as it indicates investors are moving towards safer investments.

Of course, there has been anxiety, as we all remember the 2008/9 great Recession, caused by a financial crisis, and the effect on savings, investments, and global economies. There is no doubt that today's global markets are even more connected than before, and when there are health or economic concerns in any part of the world it is most times just a matter of when it will affect countries thousands of miles away.

Economies naturally go through cycles, as once buoyant asset prices always become depressed as the nature of markets is that demand always naturally rises to a point where it is irrational.

For example, if asset prices are depressed and sophisticated investors see opportunities, they will purchase shares. What happens is that more investors will come to the market and purchase shares, as renewed demand drives more interest, and sends prices even higher, and during the upward trend you may have some people selling to lock in returns, but in general there is an upward trend. Then what happens is that the more unsophisticated (retail) investor sees the movement in prices and starts demanding shares themselves. By this time the major movements upwards have happened and the unsophisticated investor will get some returns, but not what was seen before, and inevitably this will push prices beyond where there is any perceived value.

By this time, sophisticated investors would have locked in their returns by selling or hedging against price reductions. As the larger sophisticated investor starts to sell, or pull back on purchases, prices start to come down. As an example, when investors leave the stock market and go towards safer investments, hence inverting the bond yield curve.

The result of this is an economic slowdown, which many times leads to a recession, as retailers lose value and hence lower income. They then demand fewer goods and services and manufacturers cut production leading to a decline in economic activity.

So recessions, like death and taxes, are inevitable.

The problem is not that recessions happen; the real problem occurs when we are unprepared for it or deny that it's happening. In other words, the only way you can fix a problem is to first recognise that you have a problem, and this may be the Achilles heel in the US strategy.

In 2008, for example, we even had some senior government ministers saying that a recession is good for us and we would easily be able to weather the global crisis at the time. History tells us what has happened.

Because of global concerns today, we are already seeing the threat of job losses in the bauxite sector (JISCO). No doubt any global recession will affect us when it inevitably occurs, and what we must do is accept that it will happen eventually and be prepared for it.

The Government, and individuals, must start to consider the possible timing of such a recession, and when and how it could affect us. We don't know if it will happen in 2020 or 2021, but we must look at, and track all the indicators, and determine how it might unfold. Once we understand that then we can know what we must do to mitigate the effects of any global slowdown. For example, no doubt there will be job losses, as some industries like bauxite will inevitably be affected, and not only Government must accept that, but also trade unions, as failure to accept it will cause us not to apply practical remedies.

The next effect may be on remittances, as markets such as the US and UK are affected, and income levels fall from job losses or the natural tendency to reduce expenditure when uncertainty arises.

If a recession is extended, it may then have an impact on tourism earnings, as in the short term people will more than likely go through with holiday plans they already have, and may have been paid for, but over a longer period will not plan another holiday.

This would affect our top three foreign exchange earners, and so we must do some modelling to determine when a recession is likely to occur, how long it will persist, how it will unfold, and what needs to be done to mitigate against the risks. So, now that we have greater fiscal space, do we look at how much money we can afford to use to continue to spend on infrastructure and housing development, which will create jobs and make us ready for the inevitable economic expansion after. How do we organise our labour productivity, so that we create more value from each dollar so that our output is preferred?

One of the most recession-proof things we can do is ensure that we have a very good public transportation system in place, which will reduce foreign exchange needs (oil and car parts), increase productivity (less time spent in traffic), and increase disposable income (persons will save by being able to take public transport).

So the fact is, it is inevitable that a recession must come. What we must do, now that we have indicators, is predict when, for how long, and put measures in place to prepare for it and not ignore the signs that inevitably lead to a worse effect.

Dennis Chung is the author of Charting Jamaica's Economic and Social Development and Achieving Life's Equilibrium. His blog is dcjottings.blogspot.com. Email: drachung@gmail.com


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