Weakening world economy sparks downturn fears
Print Edition
FINANCIAL markets are flashing a key warning sign of a recession, and the global economy is weakening.
All of which is heightening fear about the US economy and about whether the 10-year expansion, the longest on record, is nearing an end.
On Wednesday, a rare realignment in interest rates intensified those worries: The yield on the benchmark 10-year US Treasury note briefly fell below the yield on the 2-year Treasury for the first time since 2007.
Normally, investors earn higher interest on longer-term bonds than on short-term ones. Put another way, the government will usually pay more to investors who are willing to lend their money for longer periods.
So when that equation reverses itself — when longer-term Treasurys pay less than shorter-term ones — economists call it an “inverted yield curve.” An inverted curve suggests that bond investors expect growth to slow so much that the Federal Reserve will soon feel compelled to slash short-term rates to try to support the economy.
In short, it’s a sign of economic pessimism. Inverted curves are, in fact, remarkably reliable harbingers of recessions: They have occurred before each of the past five downturns.
Julia Coronado, chief economist at MacroPolicy Perspectives, sees a 40 percent probability of a downturn within the next 12 months, up from 30 percent last month. Those concerns stem in part from the US-China trade war, which appears to have discouraged many businesses from expanding and investing in new buildings and equipment. It is also harming Germany’s export-led economy, which shrank in the second quarter. A chaotic British exit from the European Union looms this fall. Japan and South Korea are also engaged in a trade fight.
And the Trump administration has essentially acknowledged that its planned 10 percent tariffs on US$300 billion of mostly consumer goods from China would hurt US shoppers. That’s because many retailers would raise prices to account for the higher tariffs on Chinese imports they would have to pay.
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