In case you haven’t heard, chances of a recession kicking off in 2020 are quite high, with some analyses showing chances as high as 70%. While many are wondering how to prevent it or get through it, it’s important to be able to identify why it’s happening in the first place, as well. While it’s impossible to pinpoint it down to any single factor, here are a few culprits that could be behind it.
As with 2008, lending practices are again, one of the leading causes of the financially precarious position that has made us ripe for a recession. Rather than sub-prime mortgages being the big cause, however, this time it’s interest rates that have been too low for too long, leading to an increase in prices of assets such as real estate. This inflation of asset prices has to be corrected at some point, and the sudden drop in their market value can lead to volatility across other markets, too.
Weakening industrial production
Despite all of the noise that has been made about recent job creation, the truth is that the US economy has been slowing for some time, with industrial production being one of the biggest indicators of that slow-down. Manufacturing output in the US alone has fallen after a long period of growth that ended in 2018. This sluggish manufacturing sector applies to the Eurozone as well, and in the UK is impacted by some political factors like Brexit’s disruption of trade.
The oil trade war
Trade wars have always been a leading factor in causing recessions, putting multiple economies in precarious situations that are much more susceptible to volatility. Fossil fuels are one of the most valuable assets in the world and, as such, volatility in that market can have a huge impact. Recently, Saudi Arabia and Russia started a price war over oil, causing oil prices to fall by 34%. As a result, the value of oil is falling quickly, with production being stepped up on both sides of the war, causing fears of a large impact on the global economy.
It’s almost impossible to not be aware by this stage but, at the moment, the Coronavirus is growing at a high-speed in various countries throughout the world, with China and Italy being the most severely hit. Officially named a pandemic, it has led to a massive decrease in stock values. This is largely due to the fact that people are much less likely to go out and shop under the fear of catching an illness that could be a fatal risk to members of their family. At the time of writing, the Dow Jones hasn’t recovered from its ongoing spiral, even after $1.5 trillion was given to banks by the federal reserve to boost the economy.
Understanding the causes of major financial upheavals is important. In 2008, financial regulators and governments missed a major chance to hold the institutions that caused the recession responsible and, in part, it’s the same behavior that’s put us back in such a precarious position.
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