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The Global Economy has taken a turn for the worst in the last year, and while no one really knows what is happening, there are some thoughts on what might be happening. - Michael Parkin's Macroeconomics, 10th Edition This introductory blog post will help you understand not only what is happening in the world economy by showing you what typically happens before an economic downturn happens but also show you how to prepare for when this economic downturn hits so that it doesn't hit your company by surprise. What is happening in the world economy? As the following slides show, the rate of global trade has been steadily growing over the past few decades. In fact, in 2016 alone, global trade grew at a rate of 4.9% which is a record high in modern history. The chart below shows this trend in action. The blue line represents average annual growth in world trade, while the green line represents annual growth in world real GDP (in red). You can see that when global trade grew faster than real GDP it was because exports have been growing faster than imports for several years before that occurred. That is why the blue line is still going up while the green line is going down. What typically happens before a downturn? While a downturn in a market tends to happen suddenly, economists have learned that it has typically been preceded by other signs. Perhaps the most important sign of impending trouble, other than declining growth rates, is when interest rates begin to go up. As you can see from the chart below, bond yields have been going up over time for many years now and they have been getting close to record highs for several years now. In fact, they have just recently returned to their historical average which means that we could soon start seeing them trend upward again. In the aftermath of a downturn, interest rates have been shown to go up significantly because banks have been trying to get rid of their excess liquidity from the previous years when the economy was doing well and trying to avoid making loans and investments at a time when they might not be able to pay them back. This is because in times like these, when demand for all loans and investments tends to be decreasing at the same time, we tend to see higher default rates by borrowers. Fixed income investors (bond holders) often buy into this trend by buying more bonds in anticipation of an upward move in interest rates that would help them make more money on their existing portfolio. This is known as an inverted yield curve which is what the US saw in 2007. This is typically followed by a crash in the market followed by a crash in the economy. When you look at this chart, it should make sense that we could be heading for a downturn given that we first saw yields go to extremely low levels and then we started to see them go up again after 2007. cfa1e77820
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