Your Guide To The Next Recession

With the global economy coming off its best performance in six years, it may seem strange to be speculating about the next recession. But when it comes to investing—and policy making—it pays to think ahead. In the following pages, we lay out some potential causes and warning signs of a downturn and why, if one occurs, it could end up lasting for a while.

- Jonas Bergman, Enda Curran, And Rich Miller

1 Central Banks Wade Into Historically Dangerous Territory 

Since the end of 2015, the Federal Reserve has been bumping up interest rates to keep the economy from overheating. That tactic may be the economy’s undoing.

Almost every U.S. recession since 1970 has had at least one thing in common: a sustained campaign of interest rate hikes by the Fed. As the cost of credit went up, companies and consumers cut borrowing and spending, weakening the world’s largest economy.

The only time in recent history that the U.S. central bank raised rates and didn’t end up triggering an economic downturn was in the mid-1990s, partly because of a subsequent technology driven spurt in productivity. Now the risks of a monetary misstep are rising as the European Central Bank joins the Fed in scaling back stimulus.

2 An Escalating Trade Conflict With Few Winners

The Great Depression that hammered the world economy was fueled, at least in part, by the U.S.’s passage of the Smoot-Hawley Tariff Act in 1930. The law taxed a swath of imports and triggered a global retaliation. Economists differ on the scope of its impact, but what’s certain is that world trade volume sank, and the U.S. remained in a rut until the war boom.

In 2018 the U.S. has been taking a more piecemeal approach to tariffs, but the response by its trade partners has been swift. The European Union, Canada, China, and Mexico have promised tariffs on tens of billions of dollars in U.S. goods.

Economists say a full-blown trade war would hurt confidence and sentiment, eventually slowing growth. If the U.S. raises import costs by 10 percent and the rest of the world retaliates by raising tariffs on U.S. exports, the cost by 2020 would be a dip in global gross domestic product of 0.5 percent, or about $470 billion, Bloomberg Economics estimates.