Even if you don鈥檛 pay close attention to the stock market, Wednesday鈥檚 news may have caught your attention.
The main stock indexes in Canada and the U.S. both plummeted in their worst day of the year, and economic analysts are worried that a global recession could be around the corner.
There isn鈥檛 just one reason to worry. Several economic indicators from around the world have been linked to the international drop and the possibility of an extended financial decline.
A TELLTALE WARNING SIGN
Since 1957, every recession has begun after what鈥檚 called a 鈥測ield curve inversion.鈥� That鈥檚 when the payout for 10-year bonds suddenly slips below the payout for two-year bonds.
This scenario is essentially the opposite of what happens in a healthy economy. Long-term bonds typically lead to higher yields than short-term bonds because investors are locking up their money for longer and expect more growth over a longer time period.
Basically, a yield-curve inversion indicates that investors are so nervous about the economy鈥檚 immediate future that they鈥檇 rather put their money into long-term investments.
鈥淲e are seeing investors really looking for safety in the long-term investments. They鈥檙e lending to governments at very, very cheap rates, and they鈥檙e much, much less confident about what will happen over that time period,鈥� Karl Schamotta, chief market strategist for Cambridge Global Payments, told CTV News Channel.
This phenomenon has happened before the last seven recessions. Only twice -- in 1966 and 1998 -- has there been no recession after a yield curve inversion.
The last time a yield curve inversion happened was in August 2006, nearly a year and a half before the Great Recession in 2008.
GERMAN ECONOMY SHRINKS
The yield curve inversion came the very same day as deeply concerning news from Germany. Europe鈥檚 biggest economy shrank in the second quarter by 0.1 per cent, another indicator of a possible recession.
The economic decline has been largely credited to a slump in exports to China, which has itself has been suffering its own economic slowdown.
CHINA鈥橲 17-YEAR LOW
In China, the industrial output growth slowed to its lowest point since 2002. Consumer spending also lagged.
To make matters worse, U.S. President Donald Trump is currently embroiled in a trade war with China鈥檚 Xi Jinping. The trade war appeared to slow down Tuesday as U.S. trade authorities slowed plans for new tariffs next month. Still, both countries have slapped billions in retaliatory tariffs against each other鈥檚 products.
In a global economy, a slowdown in one economic superpower has international repercussions.
鈥淭he trade war impacts China by slowing exports. And it impacts Germany by slowing demand in China for Germany鈥檚 exports. So everything from automobiles to intermediate products 鈥� has fallen off. You鈥檝e seen demand plummet,鈥� Schamotta said.
The slowdown could scare off investors even further.
鈥淵ou鈥檙e looking at two economies decelerating very quickly and that is worsening the global environment and making it much less attractive for investors to be putting money in the financial markets,鈥� Schamotta said.
WHAT ABOUT CANADA?
Canadians are seriously at risk in the event of a global recession, Schamotta said.
鈥淲e鈥檙e really sort of the victims in all of this,鈥� he said.
Canadian households are carrying large amounts of debt. A recent Statistics Canada report found that household debt grew faster than income in the fourth quarter of 2018.
Schamotta described this level of debt as 鈥渞idiculously large鈥� and suggested that Canadians could have a long way to fall in the event of a global recession.
鈥淲e鈥檙e in a situation where we鈥檙e not able to ride out the storm as well as we might have been historically,鈥� he said.
