Causes
1. Central banks wade into historically dangerous territory
Since the end of 2015, the Federal Reserve has been bumping up interest rates to keep the economy from overheating. That tactic may be the economy’s undoing.
Almost every US recession since 1970 has had at least one thing in common: A sustained campaign of interest rate hikes by the Fed. As the cost of credit went up, companies and consumers cut borrowing and spending, weakening the world’s largest economy.
The only time in recent history that the US central bank raised rates and didn’t end up triggering an economic downturn was in the mid-1990s, partly because of a subsequent technology-driven spurt in productivity. Now the risks of a monetary misstep are rising as the European Central Bank joins the Fed in scaling back stimulus.
2. An escalating trade conflict with few winners
The Great Depression that hammered the world economy was fuelled, at least in part, by the US’s passage of the Smoot-Hawley Tariff Act in 1930. The law taxed a swath of imports and triggered a global retaliation. Economists differ on the scope of its impact, but what’s certain is that world trade volume sank, and the US remained in a rut until the war boom.
In 2018 the US has been taking a more piecemeal approach to tariffs, but the response by its trade partners has been swift. The European Union, Canada, China, and Mexico have promised tariffs on tens of billions of dollars in US goods.
Economists say a full-blown trade war would hurt confidence and sentiment, eventually slowing growth. If the US raises import costs by 10% and the rest of the world retaliates by raising tariffs on US exports, the cost by 2020 would be a dip in global gross domestic product of 0.5%, or about $470bn, Bloomberg Economics estimates.
3. An oil shock in the offing
Most of the world’s largest economies are net crude importers, so when oil prices rise, global economic growth typically slows.
With new sanctions on Iran and chaos in Venezuela, the oil markets have tightened in 2018, driving prices higher. That should worry consumer nations across the developed world, which face rising inflation and crimped pocketbooks.
President Trump has urged Opec to open its spigots wider to bring prices down as US gasoline costs rise. The group of oil suppliers and its allies did agree to an output supply boost in late June, though a vaguely worded statement left much speculation over just what would be carried out.
4. All over, debt bubbles over
After a decade of unprecedented monetary policy stimulus, the world is leveraged. Total debt in advanced economies stood at 276% of GDP at the end of last year.
Three mountains of debt in particular could lead to problems.
In China, state-owned banks and enterprises have been on a borrowing tear to help the country sustain its high growth rate. Borrowing by Chinese businesses stood at 160% of GDP at the end of last year, down a bit from its peak in the second quarter of 2016 but up sharply since 2008.
Meanwhile, emerging-market government debt hit a record last year, but corporate debt may pose the real danger. Corporate debt in developing economies rose to 105% of GDP last year.
In the eurozone, sovereign debt levels are elevated. Major countries such as France, Italy, and Spain have debt near or exceeding their total GDP. The average for the bloc was at almost 100% last year, up from below 70% in 2007. Italy, now ruled by populists, will next year also face significant debt repayments, adding to concern.


Signals
5. The bond market approaches the upside-down
An inverted US yield curve has been a reliable omen of a recession, although the length of time between the inversion and the start of the downturn has varied.
There are two common explana­tions. First, as short-term interest rates rise above longer-term ones, banks find it increasingly unprofitable to extend the credit that the economy needs to grow. That’s because they borrow money short and lend it out long. Second, a yield curve inversion is a sign that investors believe the Fed has jacked up short-term rates too far and will need to cut them to counter a weakening economy.
6. When Sweden’s factories slide, Europe’s follow
Although it’s outside the Group of 20, Sweden is closely watched by economists for signs of a slowdown.
Home to companies such as SKF AB, one of the world’s biggest makers of ball bearings, and heavily dependent on exports, the country is somewhat of a bellwether.
By looking at its purchasing managers’ index, it’s possible to glean the direction of overall European manufacturing.
The largest Nordic bank, Nordau Bank AB, finds the Swedish indicator can give investors a two-month jump on the eurozone PMI.
7. Korean exports mean the world
As a technology and manufacturing powerhouse, South Korea is a harbinger. Its exports are highly correlated with global GDP. Part of the reason: China’s exports trend roughly in line with those of South Korea, which plays a central role in a complex regional supply chain. As Asia’s economy goes, so goes the world’s.


Responses
8. Central banks are running low on ammo
The Fed cut rates by more than 5 percentage points on average to counter the last three US downturns, and the ECB reduced them by almost 2.5 points. The US benchmark rate stands at 1.75% to 2%, and the ECB’s is zero.
The growth in both central banks’ balance sheets means they’ll have less room to undertake quantitative easing by buying bonds in the next downturn. The Fed’s balance sheet has risen to $4.3tn, from $891bn in December 2007, while the ECB’s has risen to €4.6tn ($5.4tn), from €1.5tn.
9. In the global financial system, ‘safer’ may not be safe enough
A decade ago, banks had too little capital to withstand losses during turmoil. Over the past decade, regulators have tried to shore up their defences. Since the latest global regulatory framework released in 2011, the world’s banks have almost doubled their capital levels to build their resilience. The biggest banks have built up their capital even more. Bank of England governor Mark Carney says the global system now is “safer” because the big global banks have capital levels that are 10 times higher than before the crisis.
Still, many of the academic experts who were concerned about leverage at banks before the crisis are now worried the drive hasn’t gone far enough. Stefan Ingves, the Swedish central bank governor who oversaw the latest capital agreement known as Basel III, said in a speech in January that the work on bank capital levels has just begun.
10. Borrowed time
Since the last crisis, debt has surged around the world, limiting governments’ ability to buy their way out of trouble. The details vary by country, but global debt is up to a record $164tn, according to the International Monetary Fund. Global public and private debt rose to 225% of the world’s GDP in 2016, the last year for which the IMF provided figures.
No single country or group is to blame, although China accounts for almost three-quarters of the rise in private debt since the financial crisis. More than a third of advanced economies have debt-to-GDP levels greater than 85%, three times more nations than in 2000, the IMF said. Meanwhile, a fifth of emerging markets and middle-income countries have debt levels above 70% of GDP.
In Europe, an agreement born out of the eurozone crisis will limit governments’ ability to counter a recession by borrowing. A plan by French President Emmanuel Macron to create a common budget for the euro area remains vague.