The world economy is slowing down and signs of a possible recession are increasing

After two very good years in the global and the Baltic economy, the situation in the global economy has changed significantly in 2019. The good news are that current industry and trade data are still far from the levels where we should worry about serious crisis. In addition, in both the US and the eurozone unemployment remains low and consumer sentiment is strong. Also, the global economy overall continues to grow. Yet manufacturing and world trade are close to recession, while the global economy is expected to grow at a slowest pace since 2009. In addition, the global economy is threatened by escalating trade war between the US and China. Signals of a possible recession are increasing, and they cannot be ignored.

One of the strongest recession signals at the moment is the inverted yield curve for US and Eurozone government securities, which means that short-term interest rates are higher than long-term rates. This reflects investors' cautious outlook for economic growth and historically this situation in bond markets has been a reliable precursor to recessions. Does all this mean we should worry about a new crisis? In my opinion, not yet. Historically, the inverse yield curve has not always meant a recession, and even if the recession is approaching, it does not always mean a deep crisis. On the other hand, major shocks in the global economy are almost always triggered by strong financial crises, major wars or price shocks. In my view, at least for the time being, there are no obvious factors in the financial sector that would threaten to turn the current cyclical slowdown into a more serious crisis, but there are certainly potential risks.

Further escalation of the trade wars (especially if they would hit Europe), any unexpected financial shocks or a chaotic no deal Brexit de could further destabilize the global economy and turn the current cyclical downturn on growth into a more severe recession.