As Recession Risks Near Recent Highs, IMF Urges G20 Stimulus Efforts

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Summary

While the U.S. economy is doing relatively well, the IMF urged the G20 to engage in stimulus.

Recession risks, according to some indicators, are at all-time highs. Investors shouldn't panic but should pay attention.

There are potential issues in the E.U., U.K., Africa, and elsewhere. Low oil price, high inequality and other issues could crimp the economy.

This past Thursday, the IMF pleaded with the G20 to roll out growth-boosting policies. The IMF called the situation "urgent" and painted a rather dismal picture of the global economy. For investors, citizens, and even policy makers in the United States, the dark tidings from the IMF may be a bit difficult to comprehend, yet there are numerous soft spots in the global economy that should command investors' attention.

While the U.S. economy is strong, abroad several hazards remain. In fact, according to Bloomberg, recession risks are now at historical highs.

None of the issues identified by the IMF and other analysts, strike me as immediate and unavoidable risks. Of course, downturns can happen quickly and take investors by surprise, so keeping an eye on global events is essential. Still, the United States economy appears especially strong right now with the housing market, hiring, and other key indicators painting a relatively rosy picture. Regardless, it's important for investors to at least be aware of some of the major issues.

The IMF has been especially downbeat over the last few months. A quick glance through IMF headlines and you'll find plenty of stories from the IMF warning of falling income in Africa, high debt in China, and growing income inequality in the United States, among many other things. While the IMF is supposed to take a critical view on the economy, the extent of the warnings are something investors should pay attention to.

With U.S. markets now in all-time high territory, the risks have increased for investors. With markets having reached new heights, the risks of a steep fall cannot be ignored. Still, if investors jump the gun and sell off before any downturn strikes, they could miss out on big gains as markets break new ground.

While investors shouldn't panic or lose sleep over global events, they should keep an eye on some of the key factors. Below, I've outlined some of the major events the IMF has noted over the past several weeks and provided some brief analysis.

United Kingdom and European Union Are Major Risk

The European Union and the United Kingdom have shot into the spotlight following the Brexit vote. The debate has waged back and forth over whether or not leaving the E.U. will be bad for the U.K. economy. Before the Brexit vote, 88% of 600 professional economists surveyed believed that the U.K. would suffer a long-term fall in GDP if it left the Union.


Meanwhile, data from Markit showed that the U.K. economy has already started to contract, and the pound is plunging. PMI readings show that the service sector fell from 52.3 in June to 47.4 in July, the lowest reading seen since the depths of the Great Recession. The pound has taken a beating too, falling to a 31-year low vs. the dollar.


On the E.U. side, besides losing access to the U.K. market, the precedence set by the Brits could embolden other countries. Infighting in the European Union remains high, with southern European nations still struggling with high debt and high unemployment. Meanwhile, the massive flux of refugees and migrants from across Africa and the Middle East is creating political tensions.

Low Oil Prices Pressuring Some Economies

Low oil prices can be good for some people. American consumers, for example, can reinvest savings at the pump into other consumer goods. For oil-dependent nations, cheap oil can spell disaster. Russia's economy is sinking due to a combination of low energy prices and sanctions regarding Russia's seizure of the Crimea and other issues in Ukraine. Last week, the IMF noted that Russia's economy was starting to grow modestly, but that medium-term risks remain due to low oil prices.

Brent Crude Oil Spot Price Chart

Brent Crude Oil Spot Price data by YCharts

A few day ago, the IMF warned that Nigeria, one of Africa's largest and most prosperous economies, was falling into recession and would contract by 1.8% this year. The IMF is also moving to prop up Iraq through a $5.34 billion loan. Besides the Islamic State and instability, Iraq is also struggling with low oil prices.

IMF Believes Weakness Poverty, Inequality an Issue in U.S.

Even as unemployment has dropped below 5%, the IMF has downgraded its growth forecast for the U.S. economy from 2.4% to 2.2%. IMF boss Christine Lagarde noted that there were four factors, namely participation in labor force, productivity, polarization, and poverty, that are threatening the U.S. economy.

Despite the relatively strong recovery the U.S. economy is enjoying right now, the gap between the rich and the poor has continued to rise. Average income for the top 1 percent of households surged 7.7% last year to 1.36 million. Average incomes rose by a respectable 3.9% to $48,768.

Growing inequality carries with it political and economic risks. Politically, inequality tends to lead to populism, something that's becoming evident with the rise of Donald Trump. Economically, inequality can lead to distortions in markets, such as when the wealthy invest in the housing market, driving up prices, and can restrain spending in the middle and lower classes.

China a Bright Spot for IMF

While other pundits and analysts, including myself, have been downbeat on China, the IMF actually upgraded its growth forecast for the country. The IMF rewarded China with a .1% upgrade in its growth forecast, raising the total to 6.6% for the year.

The upgrade came due to China's efforts to stimulate the economy, including keeping interest rates low, fiscal expansion, and increases in investment. The IMF now projects China to be the fastest growing major economy.

The IMF has also called for other countries to essentially follow suit and launch their own stimulus efforts. Many world leaders, including Jack Lew, remain skeptical of the need for extensive stimulus measures.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.