Slow down, crisis.
Indicators that another recession is upon us in the near term are showing yet are not entirely conclusive, below an overview of my strings of thought in regard of this seemingly impending economic slowdown.
Around April 2018 the first indicator was showing its ‘face’, apparent enough to have ‘established’ institutions worrying about the longer term, in the form of bond yield rates nearing inversion. The so-called ‘inverted yield curve’ means that investor gains on bonds with shorter terms are higher than those on longer term bonds, more on this and why it predicts a recession in this article. This was clear to some in the industry even earlier. I had the first conversation on this topic in January 2018, and I was hearing about it for the first time given I am not a financial analyst nor a highly connected industry insider. Once this first happens it means that a recession is highly likely within 6 to 24 months, as this phenomenon preceded 9 out of 10 crises that our economies have endured since the second world war.
Fast forward to now and we see Italy is the first country to have slipped into recession, alarming as reportedly it has some weak links in its banking sector. However, where some of the southern European states were at the heart of the last crisis now the cracks seems to be appearing within the so called ‘core of the EU economy’, Germany and France. Hence, Europe is now being described as the potential ‘weak link in the global economy’. With other messages surrounding preparations for a slowdown coming through as well, such as Venture Capitalists telling the startups within their respective portfolios to hoard cash, generating the ability to sustain burn rates for at least 18 to 24 months.
Recession triggers, in lack of a better term in my vocabulary, are rife. Regardless of one’s personal views on Brexit, given the toxic mix of alarmingly high consumer debt levels in the UK, inflation consistently being an issue with prices up for everyday shoppers, real wages (on average) only starting to rise recently and the Bank of England’s base rate at continuous lows, Brexit in whatever form and even if delayed, will have an impact. (NB: I am only looking at Brexit from an analyst’s perspective, there is a lot of emotion surrounding it and emotions raising to high levels never seem to have had a positive impact on long term economic growth).
It will be interesting to closely watch how this plays out in the next year, especially as the world is vastly different compared to just over 10 years ago (during the last crisis, 07/08); the first Iphone had only just been released, Facebook, Twitter and others were in their early stages and Bitcoin, well, Bitcoin itself did not exist yet. We now have a wealth of blockchain startups (e.g. BABB, VeChain, Zilliqa, Crypto.com, etc) and even scaleups, large corporate giants exploring their own ways in which they might interact with this technology, be it in the form of developing their own DApps (with the rise of new programming languages like Solidity) or creating a private blockchain of their own.
Fintech was more or less born out of 2008’s ‘Great Recession’, a revolution to innovate, democratise and bring back integrity to the world of finance. Freetrade Team’s Viktor Nebehaj and Toby Steinberg reflect on this in ’10 years on, fintech hasn’t really delivered’. Part of that revolution are Freetrade, challenger banks (e.g. Monzo), money transfer companies (e.g. Transferwise) as well as equity crowdfunding platforms such as Crowdcube. The latter brings us to yet another industry segment that did not exist. Besides the above there are numerous examples of industries, sometimes entirely new ones, that were looking completely different 10 years ago or have giant niches that did not exist (think Uber, Airbnb, Deliveroo, etc. etc.)
How will all the startups that have popped up during the last 10 years weather the crisis, how will central banks react, what will governments’ contingency planning be, are just some of the questions that reverberate through my head. While smaller business are likely to be more agile when it comes to going into hibernation mode to ‘get through colder times’, it will inevitably lead to job losses as burn rates need to be reduced. Larger organisations will likely already have ‘restructered’ in the past months and others will continue to do so. In addition, now, more than ever before, there are a pool of freelancers working in the ‘gig economy’ that are not necessarily protected from sudden income loss. What will happen if assignments become scarce.
Another complication comes in the form of the ‘Economic Generation Gap’, in short it means if young people have a job they are likely to be lower on the wage ladder than their parents were at their age in terms of purchasing power, besides being on an economic back-foot in general (think Millenials compared to Generation X). I say ‘if they have a job’ because another ‘product’ of the 2008 crisis is the continued high rates of youth unemployment in many countries.
Central banks might be forced to increase base rates to higher levels, yet will they be able to, as a large proportion of people might be worse of in terms of their abilities to pay of debt (be it secured or unsecured). Perhaps the next crisis will be a trigger for governments to get serious about overhauling their taxation systems, having giant corporates actually pay their fair share and perhaps explore a wealth tax instead of cracking up higher band income tax rates (as the latter might not generate a lot in terms of tax revenue).
This all might lead to more people getting serious about ‘no strings attached’ basic income, as this could become a necessary reality, meaning those who lost their jobs can actually pay, albeit in smaller amounts, their mortgage, rent, utility bills and focus on learning, personal development, career progression and how to get on with life. Both could mean that economies can churn on in their own right, rather than contract significantly. Redistributing wealth doesn’t mean we need our governments to become Robinhoods, it simply means we need to take bolder measures that will allow everyone to grow on their own.
I like to think crises also bring with it opportunities besides, often tough, challenges. A slowdown can be like a wildfire, if managed and contained properly by all that have a stake it could easily leave only a part of the land destroyed, on which new life can be cultivated (read: innovation). However, it is clear that we need something to happen, getting our heads together (read: transcend party politics in all countries) to allow the world as we know it to continue to grow, yet in a more sustainable manner.
Would love to hear your perspectives!
Please do clap if you enjoyed (some) of this post.
