Complacency is always dangerous when it comes to investing. Over the past few months, many investors globally have begun to let their guards down, as the episodes of severe financial crisis appear long gone.
However, there are many signs that a global recession is still possible once again. For many parts of the world, including the U.S., the unemployment rate is still stubbornly high.
This high unemployment rate is not the only sign that a global recession could occur, but it is worrisome considering the trillions of dollars that central banks have pumped into the financial system over the past few years.
As I have previously stated several times, the direction of the trend is very important. With the world teetering on the brink of another global recession, there’s one key question to ask: is the world economy improving or deteriorating?
While the U.S. appears to be stabilizing, and even improving in some areas—such as housing and vehicle sales—we can’t be myopic and ignore the rest of the world. If a global recession were to occur, make no mistake about it, the U.S. would feel the effects. Certainly, a global recession would not improve our unemployment rate.
Over the last few weeks, one area of concern to me has been the inability of the eurozone to make any improvements in its economic growth levels. Don’t forget: a couple of years ago, the financial crisis within the eurozone created extreme volatility in our markets.
Germany has been the foundation and strength of the eurozone, holding up its weaker members. However, the possibility of a global recession would increase in terms of probability if Germany were to decline economically.
The latest information from the Centre for European Economic Research (ZEW) is a report called the “ZEW Indicator of Economic Sentiment,” which shows that German sentiment has indeed begun to decline. The ZEW indicator dropped 2.2 points in July versus June. (Source: “ZEW Indicator of Economic Sentiment,” European Economic Research, July 16, 2013, accessed July 18, 2013.)
Does this one data point prove a global recession is coming? Of course not; however, one must include as many variables as possible to calculate the probability of a global recession.
We all know that the unemployment rate within the eurozone continues to be massively high. If sentiment in the strongest nation is now turning negative, albeit a slight pullback, this cannot be a positive for the future of the unemployment rate within that economic zone.
More data showing troubles within the eurozone include the fact that in June, new car registrations dropped by 5.6% versus 2012. For the first six months of 2013, there was a drop of 6.6% in the number of cars registered within the eurozone than the same time period in 2012. (Source: “Passenger Car Registrations,” European Automobile Manufacturers’ Association web site, July 16, 2013, accessed July 18, 2013.)
Ultimately, in order for a global recession to be avoided, there will need to be a drop in the unemployment rate. However, if sentiment continues decreasing, that will mean that individuals and business owners are less certain about the future. In that scenario, who’s going to go out on a limb and hire new individuals?
~ by Sasha Cekerevac, BA
This article Media Hype Could Cause Investors to Be Blindsided by a Global Recession was originally published at Investment Contrarians