A plunge in oil prices has signaled possibility of global recession in 2019, sending shock waves throughout the global economy including Kenya.
Bloomberg has reported that despite an agreement early last month between Opec and Russia to reduce oil output by 1.2 million barrels per day starting this month, the price of West Texas Intermediate crude has fallen more than 40 per cent from its high for the year in early October.
Analysts think the drop in price is due to depressed demand of the input due to depressed consumption as the demand for energy is expected to fall even more than the reduction in production that Opec and other countries will implement.
Most experts predict the recession- a period of temporary economic decline during which trade and industrial activity- are reduced. And while the global economy is yet to experience a fall in GDP in two successive quarters, the signs are already on the wall.
Another source of worry is the stock market in the US. The S&P 500’s, American stock market index based on based on the market capitalisations of 500 large companies having common stock listed on the NYSE or NASDAQ, forward price-earnings ratio - a gauge of a stock’s value against analysts’ earnings forecasts - indicates that US stocks have not been this cheap in four years.
“Another, the price-earnings to growth ratio, suggests that only in the depths of the financial crisis could investors snap up cheaper stock,” reported The Telegraph.
Weaker demand
A slump in consumption in major economies such as the United States (where it is feared the recession will begin) and European Union will hit Kenya the hardest. Not only does Kenya exports most of its goods to these economies, there are also a lot of Kenyans who eke a living in these regions.
Moreover, Kenya’s securities market depends on investments from outside, mostly Europeans and Americans. Should the investment and consumption occur in those two markets, money will be pouring into the country.
“For investors attempting to adjust their portfolios in anticipation of a recession by the end of 2020, recent economic indicators carry a message: They may have to prepare for the downturn to start as early as 2019, despite stocks enjoying a recent “dead-cat bounce.”
Bloomberg News reports that a Federal Reserve Bank of New York gauge puts the chances of a recession at almost 16 per cent a year from now, the highest since November 2008.
The price of oil has collapsed amid a combination of glut and weaker demand, reports Bloomberg.
“The International Monetary Fund has lowered its global growth forecast for 2019, with the US and Chinese economies expanding more slowly. On Monday, it was revealed that China’s manufacturing purchasing managers index dropped to 49.4 in December, the weakest since early 2016 and below the 50 level that denotes contraction. Japan, one of the world’s largest oil importers, experienced a contraction in gross domestic product in the third quarter, and economic weakness is expected to persist into 2019,” said the article.
Housing, the backbone of US economy, is also showing some weakness. “The rise in home prices since the last financial crisis, combined with relatively small increases in wages and salaries, have reduced affordability.”
The BBC, reports that the clouds are gathering. Besides US Donald Trump’s tax cuts that have seen the economy heat up and his undue influence on the Federal Reserve which is making investors jittery, America’s trade war might also escalate a recession, according to the BBC.
“The US is already well into a major trade confrontation with China over what President Trump calls the theft by China of the technology of American companies doing business there,” says the BBC.
It adds: “Three months into the year, the tariffs that his administration has already imposed on a wide array of Chinese goods are due to increase from 10 per cent to 25 per cent. China can be expected to retaliate as it did to the first round of tariffs.” Kenya is one of the countries that will be affected by the trade war. At the beginning of last year, experts weighed on the effects of trade on Kenya.
However, the continent might suffer a knock-on effect as other emerging economies, such as China, are hit by Trump’s policies. “Africa is unlikely to be the direct target of any Trump-induced trade protectionism.
“But if trade tensions escalate, potentially weakening confidence in emerging market prospects, sub-Saharan African economies are likely to be affected,” said Standard Chartered Chief Economist Razia Khan.
She added that over the last two decades, Africa’s trade with emerging markets has grown rapidly at the expense of trade with more developed partners.
“A slowdown in global trade would be a negative for trade-dependent emerging markets and could hurt their demand for sub-Saharan Africa’s export commodities,” she said Mark Bohlund, an economist with Bloomberg, agreed with Ms Khan.
“The main risk for Sub-Saharan Africa is not direct. That one [direct effect] will be relatively low,” he said, adding that Africa trades more with Europe than the US.
