hello YouTube viewers I'm Kati Marton
the markets editor here at the Financial
Times in London sitting with our
economics commentator Martin Sambu today
we're discussing whether or not the
world is heading for a recession we'll
be trying to answer your questions so
please leave them in the comment section
now some people have already left some
great comments and thank you for those
if you want to read our latest market
coverage click on the story in the
description so are we heading for a
recession this is the question that's
become so important because we've seen
that some signals indicate we could be
on the verge of an economic meltdown the
US yield curve inverted late last month
global p.m. eyes are showing that
companies are contracting and getting
nervous Indian Chinese and European
economies are all slowing down so Martin
what do you think I suspect if we knew
the answer to this question we'd be
sitting on a yacht somewhere rather than
in this studio this is all joke about
economists and how economists have
predicted nine out of the last five
recessions what just means that people
rarely get this right yeah all right
it's people predict one and one doesn't
happen or they don't predict and then it
does happen so you know with that as a
benchmark we can at least try so I don't
know what there's going to be a
recession I don't think is certainly not
inevitable but it could happen what we
do know is that we have you could think
of it as recessions in sort of segments
of the world economy so trade is hurting
because of the trade war so trade and
you know in some parts of the global
trade flows are contracting so you could
sort of talk of a trade recession most
goods that are traded are manufacturing
goods right there's goods or traded more
than services and there is a
manufacturing recession in the sense
that manufacturing production is
contracting in Europe in the u.s. now so
for one part of the economy there is a
contraction and overall of course
there's a slowdown the world economy and
most big economies have been slowing
down for the last year even more and the
question is that slowdown go all the way
to zero and below that's the big
question
what do you think well I mean like you I
don't have a crystal ball I don't know
the definitive answer but it's certainly
a question that people and markets are
asking
facing Lee often not least because we've
just been in this bull run for such a
long time ever since the crisis of 2008
markets have been pretty benign they've
been juiced up by lots of central bank
support and now we're at the point where
people are sort of looking at their
watches and thinking aren't we sort of
jus a better public so people stop
casting around and looking for reasons
to worry now clearly a very big reason
to worry is trade as you say the number
one thing that comes up in discussions
with economists and investors around the
city is about what's going on between
the US and China now do you what's your
sense do you think that this is a
genuine reason for caution or I mean
it's clearly reason for caution is it a
reason for panic or do you think that
both sides will back away before they
really go all-in there are a lot of
people who benefit from trade yeah
there's there were very few people who
were calling for an outright trade war
before basically Trump not President
Trump launched one he has his political
motives he also has a lifelong belief
that the u.s. is being ripped off by
early was Japan no its Germany it's also
so now it's China it's also Germany and
you know it could well move to Europe at
some point his target but you also see
his sort of pattern of making a lot of
chaos and then striking a deal that
sometimes looks very much like what he
had before this is what happened in the
trade negotiations with Canada and
Mexico
you know speculatively my bet is that
when it's politically convenient for him
he will you know declare victory there
will be some changes to the trading
relationship between the US and China
but it will be back to something more or
less similar to what we had before but I
think there's an outsized chance outside
chance that there are by now enough
protectionist forces in the US that
really want to kind of rebreathe ease
global supply chains that have developed
over the last 30 35 years the u.s. is a
big enough economy that he can kind of
go it alone it'll be less rich as a
result but
it can do it is a huge economy but
that's going to be a big political fight
that isn't just about Trump but also
inside the Democratic Party there are
different opinions about trade with
China so it's it's an open question I
think the probability is that at some
point when it's politically convenient
it will quiet down and we'll get back to
not quite the status quo ante but
something that looks pretty much similar
to what we used to and then we can just
stop talking about the whole thing we
can play something else something you've
already brought up is manufacturing and
this is obviously first in the line of
fire when trade wars really get fired up
and we've seen that I think we've got
some chance to demonstrate this that we
should be able to get on the screen for
you but this is really showing the
strain now there's a large part of the
world that is showing that manufacturers
are getting incredibly nervous one of
the things that you hear a lot about in
this situation is p.m. eyes Purchasing
Managers indices basically there are
companies that go around calling up
companies and saying hi how's business
how's it going what are your orders like
what are you what's your hiring schedule
like what are your inventories like how
are you feeling about the next few
months and that produces these indices
called p.m. eyes and they're a really
good indicator of how worried people are
and so you know you have to kind of know
what you're doing when you're looking at
these PM eyes what they are telling you
and what they're not but when you get a
number that's under 50 that is their way
of saying that's the indices way of
saying yeah we're now looking at a
contraction and there are lots of spots
around the world you look at Germany
it's obviously the big example in Europe
but there are lots of places around the
world where company executives have said
we're saying yep we're worried this this
is hurting I mean how much of a feed
through is that to the bigger picture
for you well that's exactly the question
because manufacturing making things it's
still important but it's actually not a
very big part of which economy yeah
maybe you know 20 percent depending on
the economy most people don't work in
factories most people don't make stuff
they work in services retail services
you know shops cafes restaurants well
there could be this sort of services
that make the economy go around but you
don't see them on the high street or on
the Main Street if you want
the US accounting legal services all
sorts of expert work you know you're the
university sector research all of these
are services and that makes up you know
roughly eighty percent of the economy
and so until now this slowdown that
you've just described an actual
recession in the manufacturing sector in
industry the big question has been is
this going to feed through services and
most places that hasn't happened yet
it's kind of you know it's don't you
know it's it's uncertain it's not really
booming anywhere but services seem to be
holding their own in most places there
are sort of small signs in Germany
services have such a come down a bit in
the UK quite a bit still doing a lot
better than industry everywhere we don't
know we what we do know something about
is how it could happen and some of it is
because factories the manufacturing part
of the economy our customers of services
so you know if your factory doesn't sell
its goods then it's not going to buy
services from service businesses around
that will hurt or it can be a confidence
thing you know everyone sees trade war
factories coaching well we'd better
watch out and not spend money
yeah and that affects it spreads through
the rest economy that's how it would
happen yeah we've got a question here
from Robert dukes do central bankers and
governments take pre-emptive action to
avoid recessions if the curve inverse
now by the curve inverting what he's
talking about here yes exactly so one of
the big reasons why this question around
whether there is a recession at hand has
really shot up the agenda is basically
that the bond markets are flashing red
they are saying you need to be worried
about what's going to happen next
so the super safe stuff in markets
government bonds have absolutely
rocketed pretty much anyone with an
interest in markets will be able to tell
you that yields are now yet negative on
16 trillion dollars worth of debt around
the world that means all we always have
to remember it when the price goes up
the yield goes down very low yields
means a lot of people want to avoid it
basically means that people are so
desperate for safety that they're
prepared to take a guaranteed loss on
what they bind to be able to just have
some safekeeping of their funds and
we've also seen
famous inversion of the yield curve now
generally speaking this is an excellent
indicator of what's going to happen in
the global economy next but basically
speaking yes it should cost government's
more to borrow for the long term than it
should for the short term so your yield
curve should generally point higher and
what it's doing now is pointing lower
which means that there's basically just
massive demand for all types of debt and
this is crushing yields for all sorts of
different maturities and this sort of
inversion this funny shaped curve as we
call it it's a real cause for concern
what's what's your sense of whether it
is a slam-dunk indicator of a recession
because it's a huge debate yeah yeah
exactly and that's why places like the
FT we talk about recession fear so much
because of these signals yeah right so
yeah in the markets now people are
willing to accept lower interest rates
to lend for very not 20 30 years 10 20
30 years then for three months right
that's sloping down right and the market
the yield curve is a much better
predictor than economists are I made
that joke at the beginning their economy
sort of mispredict I mean you know
better than me but I think the yield
curve in the u.s. at least has been a
pretty good pretty much every recession
has been preceded by one an inversion
curve and there can't have been many
cases of the yield curve inverting
without a recession forming so it looks
like a slam dunk but I actually I don't
think it is and this is a dangerous
phrase but this time is different this
time is different in that in the last 10
years central banks have been buying a
lot of long maturity bonds so they're in
they're buying they're driving the
prices up driving the yields down which
is intended right central banks go out
there buying this stuff to make it
cheaper for companies to borrow this is
a feature not a bug it's a feature not a
bug but it also means that you can't
really take the difference between
short-term rates and long-term rates as
a pure market signal it's a result of
policy the Bank of Japan explicitly
targets both the short term and the long
term rate so it's just a function of
policy the short term rate is what is it
the short term is minus 1 in the long
term
- point one in the long term is zero so
it's just built in as a result of policy
so unless you're saying that this policy
will lead to a recession I don't think
it has the same predictive power that
he'd used to have when it was just the
result of judgments in the market and
going back to this question that we
received no Wilson central bank's tried
to get a head of research that's
precisely what's happening here we've
had not so much hints from central
bankers as kind of waving great big
signs in the air from central bankers
saying inflation is just not coming up
like we thought it would as a result of
all the policy that we've been pouring
into the system for the last decade we
have inflation mandates which means that
we have to target a certain level of
inflation
generally speaking around 2% and so with
we have to do what our mandate tells us
to do which is just keep on easing and
with interest rates basically zero or
even lower in a lot of places that means
buying more bonds and so the market is
getting ahead of those extra bond
purchases that's kind of what markets
are for now one of the phrases that
keeps coming up in my conversations with
people in markets at the moment is over
their skis there is this idea that the
bond markets have just a little bit too
far forward they've priced in enormous
bond purchases in particular from the
European Central Bank but that's kind of
trickled through throughout the system
and there is a bit of a sense now that
unless central banks really deliver
deliver some really heavy-handed extra
bond purchases maybe the bond market has
run a little bit to it far ahead of
itself would you be surprised to see a
bit of a pullback from the markets if
the central bankers don't do quite what
we're expecting them to I think that's
possible as you say the biggest where
there's the most visible is in Europe
where the European Central Bank meets
this Thursday to decide well decide what
to do but they have signaled very
heavily Mario Draghi the president and
some of his allies on on the Governing
Council that they will put together a
pretty big package in the last couple of
weeks some of the Hawks on the Governing
Council have said well maybe we don't
need to and they try to tamp down
expectations a bit so I think maybe
markets are
little bit less certain than they were a
couple of weeks ago that something big
was coming but what you're saying I
agree with that it has to be pretty
punchy otherwise Mike will say or we
expected something more
let's sell-off and interest rates can go
up even if the central bank actually
tries to push them down but what does
that do to the economy I think that
depends a bit on what the final result
is so yields have been driven down in
expectation of central bank action maybe
they'll go back up a bit
still if financing conditions for
consumers and homebuyers and investing
businesses if that's still looser at the
end of the day then I think that will be
a stimulus in the end that could stop
the slowdown maybe return you know the
idea that ideal is to get optimism back
so that people start spending again yeah
and you start to push growth back up
that's a tall order I think because you
sort of see this negative momentum but
it's up to central banks and governments
with their budgets to try to stop this
slowdown from becoming self-fulfilling
yes one wrinkle here of course is that
this global effectively policy of
negative interest rates is a is a worry
for some banks now where do you think
that fits into the equation here do you
share this idea that central banks are
so desperate to avoid a rerun of 2008
that they're throwing everything at this
issue and actually we could be at the
point where that starts to make issues
worse by making it harder for banks to
operate I mean I think the first bit of
that being desperate to avoid 2008 it
would be a really good thing
although it's a different situation
there it was a financial crisis that
caused bubble that burst and that caused
the recession that's not what seems to
be driving things now so you know let's
keep the differences in mind it's not
just a sort of size of the problem but
it is good to want to forestall a
recession so I think that's a good thing
the other part of your question was can
they push things so far down that
actually could be counterproductive and
so there are some people who say that
well if you have interest rates far too
low then banks start to struggle and
then they stop lending rather than
lending more and actually you get the
opposite
of what you want I don't actually think
so I think what we've seen so far
doesn't bear that out
but I also think that we haven't gone as
far as central banks could do so in a
sense this is literally unchartered
territory right unexplored waters call
it what you will
we've never done this before yeah so
there's there's a lot of theorizing and
speculating and saying well here's one
thing that could happen for this reason
here's another thing they could have for
that reason the empirics suffer what's
actually going on in the economy doesn't
signal that things we're going to get
these perverse consequences yeah is it
possible it's possible mm-hmm but
central bank's haven't pushed things so
far that we see any signs of that
happening so I think you know until you
actually see it happening in the banking
system I think they shouldn't you know
let these worries stop them from acting
we've we've had an interesting question
here is it a danger that we're relying
on China for economic security now I
think again we've got some shots that
can demonstrate that there has been a
slowdown in India and in China and it's
interesting also when you speak to fund
managers over here in London they all
especially look on the continent in
Europe they say you know brexit doesn't
even really get through to them in terms
of the risk that the UK could crash out
without a deal for example this is going
to be a UK problem for the UK the
country that they've got eyes on really
is China to think can trying to keep the
show on the road can it keep throwing
stimulus into the system over there to
stop the Chinese economy from
contracting well slowing down at least
now the People's Bank of China the
central bank is constantly throwing
things into the mix looking at things
like reserve requirements at banks how
much money they have to set aside it's
what they lend out into the system
they're constantly doing things to keep
supporting growth you expecting them to
keep doing that how long can they do it
for well I think they will want to try
to keep growth going the difficulty is
that there are two problems really one
is can you keep pumping in either debt
or
and spending money creation all of these
tools that everyone has used and you
know to the question it's quite correct
to say that we relied on China kind of
in the recovery from the global
financial crisis in the early 2000s
Western economies built up debt and
drove demand growth that way the
financial crisis happened and they
stopped but China picked up the slack
and started building up debt on its end
and that created demand in the global
economy now at some point you kind of
run out of Road with that the other
problem is of course that China's growth
model has been based on these trade
links that are now under threat so
there's a supply-side problem too so if
your economy is geared towards producing
consumer goods for US consumers and that
stops it's not you know you don't
automatically you can't just pump up
that without changing your economic
models so there are two big things too
big and very difficult things going on
now China can probably cope China is
still a sort of largely contained
domestic financial system so yes there
could be a huge debt crisis financial
crisis in China but the government has
the means deal with that they could
write down debt they could rescue
whoever they want to rescue it is
manageable it could be ugly but it's
manageable so I think they still have
more tools but I think also other
economies can do more on their own the
eurozone and Europe in particular where
the eurozone and the core economy
Germany have been very happy to just you
know ride this wave of export demand
eurozone is is very imbalance in the
sense that it has a large external
surplus it it exports this produces more
than it consumes but he could stimulate
consumption at home more yeah and just
produce for itself that's something you
could do would take political change it
would need German in particular to
change the focus of its own economy but
you know it's possible it's politically
difficult more than it's economically
difficult I mean that's some sort of
links to one of the things that that
again you know I keep hearing what
is that some of the big ingredients for
a recession are just not there for a
global recession they're just not there
so yes the bond market is doing funny
things but quite obviously the bond
markets been doing funny things for most
of the last decade is just doing them in
a slightly more funny fashion now yes
there is a trade war this is a chronic
long-term issue that's going to run and
run until it either fizzles out or goes
horribly wrong but some of the big
ingredients like a massive bank failure
look at me on brothers it's not obvious
where that would necessarily come from
or a huge market dislocation a massively
miss valued thing somewhere that could
just blow up that nobody has predicted
yet which again seems unlikely given the
amount of time and effort the people
have done scouring markets besides
something that's going to go wrong or a
massive run-up in interest rates from
central banks who've already
demonstrated that they're determined to
do the opposite or a huge burst of
fiscal tightening from governments
around the world and as you say the the
pressure from multilateral agencies like
the IMF for example on individual
countries is let's come on Germany open
your wallets we know this is going to be
painful we know this isn't how you roll
but open the wallet get spending
actually a burst of fiscal spending
around the world might be just what we
need and you're starting to hear that
conversation come through in the states
for example you know a lot of the
candidates that are looking to challenge
Donald Trump are saying what if we
actually spent loads of money on a green
agenda that could be economically
beneficial as well as environmentally
button beneficial he himself did it of
course not on the green agenda we have
tax cuts well it's one reason the US has
done so well over the last couple of
years because a lot of you know the
deficit is grown they've just put a lot
of government money into the economy or
taken less out in taxes so G is your
sense that this has bigger going to
become more prevalent particularly in
Europe I think it could I agree with you
that the normal causes of recessions are
not so easy to see it's either a
financial collapse but again it's not
it's not as bubbly even though the
prices are highs not as bubbly as it was
in 2007
2008 the one thing people worry about
corporate debt is just not the magnitude
no that seems to trigger something of
that order and the other main reason is
that either central banks or governments
have caused the recession by stopping
the flow the eurozone did this when
everyone else was recovering after the
global financial crisis the eurozone
tightened monetary policy increased
interest rates in 2011 and had a huge
swing in that government budgets from
expansionary to contractionary to the
austerity programs and they may not all
have admitted it but they've all
understood that that is what caused the
double-dip the second recession in the
eurozone it was entirely self-inflicted
so yes I think what you're suggesting I
agree that there's a sense that that
can't be allowed to happen again yeah
you have a new EU Commission coming in
November first they will sort of have
the political capital to to take you
know that they don't need to come in
doing any consolidation if anything they
will need to come in trying to restart
growth and even in Germany there are now
there's a lot of talk about how do we
get around these fiscal rules well
placed on ourselves so that if there's a
recession we can actually stimulate a
bit if Germany's talking about it you
know there's something exactly we could
talk about this all afternoon but we're
not allowed Martin thank you so much
have to leave it there thank you and
thanks to the viewers