They say that stock market bears are always right – eventually! Maybe the same can be said of those who predict recessions but I have to say that there are some worrying signals out there and business leaders would be foolish not to take heed.
Credit & money supply tightening
As the graph shows, money supply measures are showing nil growth in the UK – quantitative easing has been offset by banks tightening their credit procedures with the result that overall money supply is dormant. This suggests a recession may not be far away. To quote a Deloittes report from June which I have referenced previously: “CFOs are reacting to weaker domestic outlook with a sharper focus on cost control and building up cash.” The squeeze on SME payment terms is evident in the increase in Days Sales Outstanding in the UK as against many other European countries – see this article in Credit Connect:
Similarly, the Purchasing Managers Index – a measure of the confidence this population of buyers has at any point in time – has been on the wane in recent months and is currently hovering slightly above the neutral 50 mark. Contrast that with the US index at 56 and the Australian at 50 – both booming economies.
The bond yield curve is flattening
Whilst bond yield curves have not yet entered the inverted territory which has unfailingly predicted the last seven US recessions they have flattened considerably in recent months on fears of trade wars, Brexit (I couldn’t go without at least one mention of that!) and depressed economic growth expectations. As short term interest rates are almost certainly on the rise right now both here and in the US a flattened yield curve in advance of these rate hikes may indicate that an inverted curve – short term rates on debt higher than long term ones – is not far away.
There’s still time
There are no infallible predictors of recession and policy makers will be hearing clarion calls from many quarters given the above signals in the market. A recession is still not inevitable and the depth of any downturn not at all predictable.
That said, prudent business leaders will be taking note of these clouds and taking sensible precautions including: