Has The Recession Finally Arrived?

We are constantly hearing from one pundit or anther about the probabilities of a recession. It reminds one of the little children going on a family car trip with the familiar refrain “ daddy are we there yet”? The question of a recession is uppermost in the minds of the technically-minded economists who define a recession as two successive quarters in national income. And, since the basics of national income data are revealed some 6-8 weeks after the fact, economists are looking at the world through the rear-view mirror. Does it really matter whether we are technically in a recession now or next quarter? We know there are fundamental changes happening before our eyes that should tell us the world economies are in serious trouble. Consider the following:

• The coronavirus has essentially strangled the Chinese economy; we anticipate a major contraction of the manufacturing heartland of the world because of the lockdown of some 50 million people; it is not possible to quantitative the negative impacts of the virus on the world’s second-largest economy;
• Supply chains throughout the world have been severely compromised, affecting the production facilities in all industrial countries; multinationals have revised forecasts of revenues and in many cases, they admit it is really impossible to provide the financial markets with reliable forecasts for the balance of 2020; they are simply flying blind.
• Oil prices have plunged in response to what appears to be drop-in world consumption of more than 4 mb/d, lead by the huge decline in China; this price drop makes some North American energy assets unprofitable, especially Albertan oil sands and selective US shale producers;
• The travel, tourist and entertainment industries are facing challenges worse than those in the immediate aftermath of the 9/11 attacks; sporting event, public entertainment venues, personal and business travel are being curtailed and, in some cases, facing outright bans in response to the coronavirus;
• The financial markets are turmoil as they lurch from buying to selling sprees day-to-day in response to rumors regarding central bank or government actions to combat the negative efforts of the virus;

So, are we there yet? Yes, we are in a recession as industry after industry starts to feel the repercussions of the pandemic virus. Governments are just starting to roll out spending programs to aid specific industries. We can expect considerable political debate as to which industries to support and by how much. Credit allocation will become a source of considerable debate. Central banks have cut their bank rates and further cuts are in the offing. While is recognized widely that rate cuts do not deal adequately in supply-generated recessions they do ease the burden of debt service at a time when the industry will suffer revenues losses. The bond market has seen a complete yield inversion, signaling that contraction and the accompanying deflation are working their way throughout the economy. Now is not the time for governments to be timid in going into deficit.