Reuters reports that the world’s economy might be in for years of slow growth with European shares falling this week, following dismal data from China and Australia and debt problems in Spain. China is on its seventh quarter of slow growth due to a drop in service sector activity and Australia’s trade deficit for August showed lower demand for exports.
But this may be good news for companies and individuals in the bad credit loan industry. This upcoming economic uncertainty on business and finance on top of half a decade of credit crisis may strike fears in the public and remind them of the global recession a few years ago.
Jan Loeys, JPMorgan’s global strategist, pointed out that global economic volatility has collapsed to its lowest levels since the 1970s, which may be a factor in investors’ willingness to undertake risks. While global growth in the past three years has been very weak, more than four decades of data shows that volatility in world gross domestic product (GDP) is very low and matches the situation in 2004-2005.
While it seems extraordinary monetary and fiscal policy stimuli may continue into the next few years, investors are still wary of tail risks. A survey of US and European pension and insurance funds, asset managers, and private banks revealed that they believed a significant tail risk was likely to happen within the next year.
Ian Stannard of the European FX Strategy at Morgan Stanley disclosed that the negative data from Asia may put pressure on riskier assets, with numbers from Europe expected to add to the gloom.
According to Loeys, paying pre-existing pre-crisis debts is suppressing not only global economic and earnings growth but also market volatility. However, debt payment can coexist with feelings of uncertainty for the future, and this uncertainty is what is keeping risk premium high and this is where opportunity is. He recommends going into higher-yielding assets such as corporate bonds and the junk bond sector.
Analysts say the bigger, long-term risk is that the years of slow global growth, right when resources are scare, demographics are changing, and climate concerns are at their peak may bring in more problems in the future. The high unemployment rate of young people in the US and Europe, increasing dependency in the older segment of the population, and the disappointments and troubles of the emerging middle classes in developing countries bring in socio-economic and political risks which are very difficult to assess.