Word on the Street: podcast of the month
Are we seeing early signs of a global recession?
Published on September 6, this month’s featured podcast, explores the rising chances of a global recession and the implications for the UK, what central banks can do about it, and what we are doing to help investors.
Word on the Street
Word on the Street is a weekly news and financial markets podcast where leading investment experts discuss events that have been making the headlines. Each month we feature one of the podcasts online, but you can listen to all of the Word on the Street episodes by subscribing below.
About our experts
Chief Investment Officer
Will joined Barclays in 2005 and now leads the team focused on the core aspects of the investment offering. With nearly 20 years’ experience in the financial sector, Will frequently contributes to Bloomberg, CNBC and more.
Follow Will on LinkedIn.
Head of Client Investment Solutions
Toby joined Barclays in 2010 and leads the delivery of Barclays’ investment expertise to our clients and customers.
Follow Toby on LinkedIn.
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Welcome to Word on the Street, a weekly podcast from Barclays UK, where our experts help ordinary investors make sense of the latest news and events impacting the world's financial markets.
This week we discuss the rising chances of a global recession and what we are doing to help investors, with Toby Cross, Head of Client Investment Solutions, and Will Hobbs, Chief Investment Officer.
TOBY CROSS: Well in a week that saw 21 conservative politicians lose their whip and Jarvis Cocker opining that the UK politics had turned into Game of Thrones, perhaps our only beacon of hope is that our national cricket team can hold their heads up high and fly the flag for us at Old Trafford. With me to discuss this and more, is our very own soothsayer of strategy, the emperor of economics himself, William Hobbs, our Chief Investment Officer. So please join me as I don the helmet of truth and bowl a googly at this week's Word on the Street. First up, Will, the domestic media is obviously rubbernecking the wreckage of another week in Parliament. We have recorded a deep dive Brexit special Word on the Street that is available on all the usual podcast formats so we're not going to get into it too much but the storm clouds are gathering for the world economy aren't they?
WILL HOBBS: They're also gathering an Old Trafford last I’ve looked actually, Toby. Unfortunately, the England cricket team are not covering themselves in glory but we aren’t covering that; this is not a cricket podcast or a Test cricket podcast. You're right. On the world economy the dashboard of recession indicators that we have, none of them infallible in isolation or indeed collectively, but what we can say is that some of these lights have started to flash amber a little bit and the risks of a global recession in the next 12 months do seem to be rising a little bit.
TC: Well, so what's going on there then? You went on the record on this podcast a couple months back to say that there was no need for an imminent recession. Has that changed?
WH: On that podcast, on that same podcast and a few others besides, we have talked about the trade tensions between the US and China probably being the key threat to the near-term fate of the world economy and that's certainly proving true. It's a wild card. We can't really second-guess the president's next move. We have been assuming a degree of political self-interest – you've got elections coming next year and the campaign trail heating up pretty soon, a recession would surely harm the president's chances of re-election. However, we'd be wrong to assume that he's got the economy on a piece of string for a start and what you are finding is that the shockwaves from these escalating tensions are mangling the global manufacturing sectors’ confidence and worryingly there are some signs that the gloom has been leaking into other more substantial parts of the world economy.
TC: So the obvious point to observe there again – without getting into the issues around Brexit etc – is that German factory orders have been sinking and I see that the narrative amongst the press there is that Germany's on the brink of recession. Is that the right word for it?
WH: Yes. What you're looking at is that those economies which are more open and what I mean by that is for the UK and Germany, both of these economies, what you find is that exports and imports, international trade, is high as a percentage of overall GDP. And when you get to a certain threshold, we call that an a relatively open economy, particularly relative to places like the US, for example, which tends to be a little bit less open. Trade is a less important component to GDP. Now what you're finding is that Germany is suffering these problems a little bit more acutely than other parts of Europe: A) because it is an open economy, very dependent on trade, but also (B) some of its major trading partners are experiencing more idiosyncratic problems. Turkey, for instance, is quite a major trading partner of Germany, so is the UK.
TC: I was going to say, you educated me on this podcast a little while back about the concept of trade gravity theory, where countries that are adjacent to one another basically have the largest impact on each other's imports and exports. Is Germany being on the so-called brink of recession impacting the UK's position at all in that regard?
WH: I'm not sure. So far what you're finding with the German economy is that the other parts are still okay. There have been some more worrying signs in the regional unemployment data, the regional employment picture, which gets us a little bit more concerned about the transmission from manufacturing and more trade-oriented sectors into the wider economy. Because what you tend to find actually, if you think about it, is that manufacturing, because it's very productive, so what I mean by that is – it's just many machines doing it quite a lot now – what you tend to find is it's a low employer, so relative to the service sector–
TC: So more efficient.
WH: More efficient. You require less people per capita per unit of output. Whereas the service sector tends to be a very high employer, a high number of staff per unit of output. So what you tend to find is that sometimes manufacturing problems can be contained for a little bit within that sector without it leaking into the jobs market and therefore into consumption and all those kind of things. You are starting to see some signs but it's not time to run to a cave and buy tin food and shotguns, by no measure. The world economy could still avoid this, so could Germany. But it's certain that you know there are some more worrying signs around.
TC: Now we've got into a rather predictable pattern that when it looks like we're heading towards recession we can always rely on central banks around the world cutting interest rates and then that saves us for another six to 12 months, it's that likely to carry on?
WH: I could test that vision a little bit – that certainly has been the case to a certain extent, I guess. Central banks are looking busier. You're seeing the ECB, certainly more actions coming there, now more interest rate cuts, those kind of things. But I'm not sure how helpful that will be. Interest rates are already very low in Europe as we know. The Federal Reserve, the US central bank, they do look like they're going to cut interest rates a few more times. So the market is assuming that you're going to get over 100 basis points or around 100 basis points in the next 12 months. So around 1% off interest rates in the next 12 months. But the important point here is that you get a lagged effect from interest rates. So interest rate rises or cuts tend to be absorbed quite slowly into the wider economy – it can take a year, a year-and-a-half, even two years before interest rate moves up or down are absorbed into the economy. To that extent it may be a little bit too late what they're planning to do or doing right now in terms of staunching a confidence problem in the manufacturing sector which is now yet found a floor.
TC: Right so that central banks how about government spending? Sajid Javid stood up yesterday, gave quite frankly a very bullish chat to everybody, talked about the end of austerity and then gave several other examples of how the government was going to be putting money back into the economy not least a 1,000 new roles in the diplomatic service, an additional £2.2 billion to the MoD. There are a number of other areas that he promised money – in particular things like £500m to Birmingham for the forthcoming games up there in the next few years. So these are all large amounts of money. Is that likely to have any meaningful impact on the UK economy?
WH: Yes. there will be some effect from that, some offsetting effects and you could find if things get a lot worse you could find that Germany has famously quite a lot of what's called fiscal space, room to spend more money without it increasing the debt pile, the Netherlands too, so there are areas where there's a bit more space. I'm not sure how substantial it could be. But one point that people are making right now is that if you can borrow for 10, 20, 30 years for less than inflation in many countries why wouldn't you?
TC: Very good observation. Now a Scandinavian friend of mine has a saying – which is and I won't try and tell you in Swedish, but he says that there's no such thing as bad weather, just inappropriate clothing. So as the storm clouds gather economically for us, what garments are you in the Investment Strategy team putting on for our investors?
WH: I see what you did there. So first things first. We have been getting a little bit more cautious on the outlook for a while, so we have reduced our equity risk and equities, this is the area in portfolios, or funds, it's the asset class most sensitive to the global economic cycle or the major asset class most sensitive to the global economic cycle. And we've taken a big chunk out of that equity exposure in the last six months in medium-risk portfolios, in all portfolios actually. But now we are what we would talk about as neutral on our short-term views. So we don't have much net positive exposure to equity markets. Now we are watching the situation very closely obviously, ready to take more drastic action if the need arises but at the moment we're still on that fence a little bit. It's not quite clear where the next turn for the world economy is.
TC: So useful to have a team like yours monitoring all of the components of that diversified investment portfolio. So Will, one of the things that you've educated me before about on this podcast is the notion of “recency bias”, this phenomenon that people tend to remember the most recent thing that's happened and then extrapolate that, push it forward, project it on to the next thing that's coming. Of course the Great Recession of 2008 was an enormous problem for the world. Are we looking at that scenario again or even if we're looking at a recession, is it going to be different?
WH: The recovery from that last terrible crisis has been a very strong one for markets in many ways. Stock markets have returned incredible amounts for those that were lucky enough to get in in March 2009. But I think the answer to that in terms of the next recession, not from our current vantage point. At the moment the recession that may be on the cards looks to be more of a technical nature not the kind of thing that the bards would write about necessarily, or get the bards singing. The point that we would make is that there just aren't the kind of imbalances that would require the correcting forces contained in a major recession. We've pointed out for a while that US consumers and businesses still look in good underlying health, so credit and mortgage delinquencies are low. If you look at the measure of private sector free cash flow, how companies and consumers are funding their purchases and again there's not much cause for alarm there. There are also some signs that major multinationals are actually adapting to this apparent new reality in trade and that would chime actually with some the experiences of previous periods of rising international trade barriers. Growth can continue but there is an adjustment period and that's maybe what we're going through right now.
TC: Well, Will, thank you very much. Helpful and insightful as ever. As we enter the early part of autumn, I hope that as the clouds gather all we're feeling is the rain of autumn and not the tears of a million British cricket fans but with that I need to thank you for your insight and for joining us. Also a remorseless plug for our Word on the Street Brexit Special which is also available and to wish you an excellent weekend, we look forward to catching up with you on this podcast next time.
All investments can fall as well as rise in value and their past performance is not a reliable indicator of a future performance. This podcast is not a personal investment recommendation.