Technically Speaking For July 9
- Central banks aren’t ready for the next recession.
- The BIS notes the economic weakness across the globe.
- The smaller-cap indexes have moved sustainably above 200-day EMAs.
Are central banks ready for the next recession? Probably not (emphasis added):
A recession is far from inevitable — particularly one as deep and painful as the last. But the capacity for the type of decisive response that prevented an even worse outcome in 2008 has been hindered. Back then, central banks cut rates, bought up bonds, extended government backing to financial products, lent money to banks and in some cases coordinated with government authorities to make sure their rescue packages didn’t work at cross-purposes. It was an unprecedented period of experimentation, one that saved economies careening toward collapse.
But today, interest rates remain below zero in Japan and Europe. They are low by historical standards in the United States, leaving less room to cut in a downturn. Most central banks still hold huge amounts of the bonds and other securities they bought to prop up their economies the last time, which could make another buying binge more difficult and dampen its effects.
Also consider that Japan has a debt/GDP ratio over 200% while the EU has budget rules that make it impossible to engage in a large fiscal stimulus in the event of a slowdown. While it’s likely that the next recession will be mild (I’d expect a GDP contraction of, at most, 1%-1.5%), the inability of policy-makers to implement a meaningful policy response means regions could be mired in slow-growth for an extended period of time.
The recent global slowdown has been deeper than expected. The following is from the Bank of International Settlements: