A Storm’s Coming: A Grim Economic Warning from The World Bank

Imagine that you’re walking along Queen Street in Auckland; walking past busy shops and begging buskers. It’s a warm, sunny day.

You weave in and out of oblivious herds of meandering tourists.

The smell of mince and cheese wafts through the pie-shop doorways.

The 11:30 ferry coming in from Waiheke toots its horn.

Life is good.

But as you look northward, down Queen, over Devonport, and just beyond the tip of Rangitoto, you spot something unwelcome — a heavy, dark blanket of menacing rain clouds approaching.

Now. your average Kiwi would simply shrug their shoulders and pull out the umbrella they were carrying…knowing that the weather often changes without warning.

But the tourists you passed earlier…they’ve been caught unawares.

They sprint to the nearest convenience store and buy up the limited inventory of heavily marked-up umbrellas. And if they’re too slow? They get the poncho. Also overpriced.

What I’ve just described isn’t unusual at all. In fact, I see this play out regularly from my office window on Quay Street. You’ve probably experienced it too.

Today, I tell you this story because you and I will soon have a choice.

As the skies darken and the outlook grows dim, will we be armed and ready? Or will we be the ones who end up cold, damp and penniless?

The World Bank has just issued the January edition of their Global Economic Prospects report…and they have titled it, ‘Darkening Skies’.

In the report, the authors reveal that global markets are in for a rough ride. They predict that today’s perfect storm of stalled growth, political tension and financial stress could sharply dent the worldwide economy.

Feel free to read the report for yourself by clicking here, but be warned, it’s 240+ pages of economic gobbledygook.

If you’d prefer not to read it, that’s okay too. I’ll summarise the important points here…

The first reason that the skies are darkening is good ol’ Donald and his ‘trade war’ with China. Trump and Xi Jinping have been tussling for some time now…over intellectual property rights, over high-tech Chinese goods, over American soybeans.

But really what we’ve been seeing is two alpha countries butt heads as they claim their territories in the new world balance.

And the World Bank correctly surmises that basically every other economy is standing in the crossfire.

They point out that emerging and developing countries — the World Bank’s clientele — would likely be hit the hardest.

It gets worse once you combine those trade tensions with the fact that production is slowing around the world.

Why, you might ask?

Your mainstream Keynesian/World Bank analyst would blame it on not enough spending by consumers or the state…but your Austrians would point to the business cycle instead.

Basically, the low, low interest rates we’ve been experiencing for a decade have ushered in ‘mal-investment’ or more simply ‘over-investment’. Too much borrowing. Too much debt.

At some point, the scales begin to tip towards a slowdown…and we experience a ‘credit crunch’.

You’ve seen it before.

Here in New Zealand, this cycle reared its ugly head in 1978, 1988, 1998, 2008…and now very likely in 2019 (Somehow, we bought ourselves an extra year this time…).

Along with the China/America issue and slowing growth, the World Bank suggests that the next recession could be triggered by…

  • a strong US dollar pushing most other currencies down
  • big-time volatility on stock markets making investing a lot riskier
  • price of oil fluctuating
  • central banks hiking interest rates

I believe these are all real threats, but I think the authors of the report miss the forest for the trees because these aren’t causes, they’re symptoms.

They reveal what a mess policymakers have made over the past few years, particularly through their policy of ‘easy money’.

They’ve flooded markets with easily available credit, which in turn ARTIFICIALLY stimulates growth.

It’s not like a defibrillator which jumpstarts the system and gets it going normally again. It’s more like an iron lung.

So what’s happened is that companies borrowed heavily to start projects that they couldn’t otherwise afford. And instead of paying it off once they righted themselves, they borrowed more!

More borrowing. More spending. All on stuff that they can only afford as long as rates stayed low.

It carried over into the individual sector too, especially here in New Zealand.

People like you and me borrowed like crazy to buy houses and cars that we couldn’t otherwise afford. We’re living rich, but we’re not actually rich. Just like those businesses aren’t actually thriving.

The result? A façade of prosperity.

What we’re experiencing now is the tap being shut off…and the stinky, rotten debt-ridden reality being unveiled.

It’s going to mean a lot of those façades being knocked down.

The World Bank suggests that most emerging markets won’t survive it. I’d add in that many companies probably won’t either. And sadly, too many regular folks who have been caught up in this mess will feel the hit too.

A global correction at the macro, micro and individual level.

The sky is darkening indeed.

Best,

Taylor Kee
Editor, Money Morning New Zealand


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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