What Is a Recession? We Explain Here

A recession is what happens when there are two consecutive quarters of negative growth. Recessions generally occur when there is a widespread drop in spending.

If a recession develops into a depression its caused by a number of circumstances. Among those are the extent and quality of credit extended during the previous period of prosperity, the amount of speculation permitted, the ability of monetary and fiscal policy to reverse the downward trend, and the amount of excess productive capacity in existence.

In economics, a recession is a business cycle contraction when there is a general decline in economic activity. The business cycle describes the way an economy alternates between periods of expansion and recessions.

As an economic expansion begins, the economy sees healthy, sustainable growth. Lenders make it easier and less expensive to borrow money, encouraging consumers and businesses to load up on debt. Irrational exuberance starts to overtake asset prices.

The average recession lasts 11 months.

With more people unable to pay their bills during a recession, lenders tighten standards for mortgages, car loans and other types of financing.

You need a higher credit score or a larger down payment to qualify for a loan that would be the case during more stable economic times.

A widely cited indicator of recessions maintains that a recession is likely underway when the three-month moving average of the unemployment rate rises by at least half a percentage point relative to its lowest point in the previous 12 months.

The fact that the Sahm indicator is 0, far below its 50 basis-point threshold, provides yet another indication that the economic expansion is ongoing.

What Does The Evergrande Group Debt Crisis Mean?

Evergrande is the second largest property developer in China by sales. As the COVID-19 virus spread across China in the early months of 2020, some expert commentators dubbed it as China’s “Chernobyl moment” – an event that would undermine the legitimacy and rule of the Communist Party.

A much more likely candidate for that title has emerged, though, in the form of the debt crisis enveloping Evergrande Real Estate Group.

China’s second largest property developer and the most indebted developer in the world with over $300bn of liabilities is out of money, and unable to meet interest payments due to both banks and foreign bondholders — though it was reported on Wednesday 22 September that some agreement has been reached to meet an interest payment to domestic bond holders.

Evergrande Real Estate Group is also a kind of metaphor for the wider debt crisis in the Chinese economy. Material consequences for both China and the global system are sure to follow in the coming months.

The immediate problem is the unravelling of Evergrande Real Estate Group, which owns more than 1300 properties in more than 280 cities across China. Until now, the Chinese government has refrained from stepping in, choosing instead to make an example of Evergrande’s “capitalist excesses” to banks and others as a way to encourage more conservative methods.

Yet some sort of state bailout or restructuring is inevitable for the developer, at least to buy time. Otherwise, the financial contagion, and economic and social instability consequences of a messy default, would be catastrophic for Xi Jinping, especially ahead of the important 20th party Congress in November 2022.

Consider that much of Evergrande Real Estate Group’s liabilities comprise pre-sale deposits by almost 1.5 million households, all of which would see their savings lost. Evergrande’s employees and others bought financial products that it issued to help fund itself, and they too would risk losing money in a worst case scenario.

The Chinese government will not want unhappy citizens to be on the hook. We expect that rather than a spectacular “Lehman-type” crisis, China will go through a period of financial distress, which will postpone growth.

Private Markets Set To Grow Globally By 2025

Private markets has become an umbrella term to refer to assets that are not liquid, not traded on organised market exchanges and are spread across different segments such as private equity, real estate, private credit and infrastructure.

The new value creation playbook, examines prospects for four primarily illiquid asset classes of private equity, infrastructure, real estate and private credit across a range of scenarios for 2019-2025.

Private equity is equity capital invested in private companies.

Investors hope that by investing in private companies they can increase a company’s value and sell their stake at a later stage through a trade sale, buyout, a recapitalisation or through listing the company on public markets through an initial public offering.

Private debt funds typically target the ownership of credit issued by private companies that either seek more flexible financing terms or are neglected by banks due to the complexity of transactions.

Private equity investments represent the majority of investments in private markets.

They project significant growth for the value of private markets of $5.5tn, $4.9tn and $4.2tn depending on how global economic conditions respond to the disruption caused by COVID-19.

Investing directly into private companies is known as direct or co-investments where there is no middleman.

In this instance, it is important to have a deep knowledge of the sector of the company you are investing in. This allows the investor to be directly involved in the growth story of a company and realise returns on exit.

Even in the worst case scenario of a prolonged recession, the projections look ahead to growth of almost 50% up to 2025.

Global Top 100 Companies Bounce Back from 2020 Lows

Global equity markets have seen a strong bounce back from the low points seen in March 2020, but volatility remains elevated, according to a new quarterly update to the Global Top 100 companies by market capitalisation rankings, released today by PwC.

The report notes that, most immediately, a disappointing reporting season for H1 2020 earnings could cause a re-evaluation of recession risks and associated stock valuations.

Having decreased by 15% from December 2019 to March 2020, the market capitalisation of the Global Top 100 as at June 2020 was only 1% behind December 2019.

By comparison as at 30 June 2020 the MSCI World Index was 7% behind December 2019, having recovered most of the ground lost in the first quarter of 2020.

Regional analysis:

  • Global Top 100 companies from the US and China and its regions recovered first quarter losses in March to June 2020 – Europe and the rest of the world did not recover the lost ground.
  • Technology companies contributed to a 21% market capitalisation increase for US companies from March to June 2020.
  • The performance in China and its regions since December 2019 benefitted from a combination of being further advanced in recovering from the effects of COVID-19 and a strong Technology and eCommerce component.

Companies highlights:

  • Eighty seven of the Global Top 100 companies as at June 2020 saw an increase in market capitalisation from March to June 2020, compared with just ten from January to March 2020
  • 10 companies included in the Global Top 100 as at March 2020 have dropped out and did not qualify for the June 2020 list.

The world’s top 100 companies account for a massive $31.7 trillion in market cap, but that wealth is not distributed evenly.

Heat Decarbonisation Could Spur Green Recovery

The decarbonisation of heat refers to reducing the amount of carbon produced by heating systems. This involves switching to low carbon heating systems in order to provide homes with ‘clean’ heat.

A new report published by the Net Zero Infrastructure Industry Coalition explores the scale of infrastructure change needed to achieve net zero heat.

The challenge is such that urgent action is required, but the transition to net zero heat offers tremendous opportunities and could lead to the development of completely new industries offering large scale employment and economic growth across the United Kingdom.

Written by a group of forward-thinking United Kingdom businesses and public sector organisations, The Path To Zero Carbon Heat report provides pathways for decarbonising the heating of Britain’s homes and workplaces by 2050 – responsible for 20% of the United Kingdom’s greenhouse gas footprint.

The report does not prescribe a specific route to net zero heat, but all scenarios considered present challenges. All require taking technologies such as CCS and auto-thermal reforming from pilot stage or infancy, through to readiness in the late 2020s, through to mass deployment starting in 2030 and continuing to 2050.

This represents an enormous challenge in infrastructure deployment previously unseen in the United Kingdom.

The development of infrastructure will need to be accelerated quickly and maintained. For example, the massive scale of electrical generation capacity as part of the electrification scenario represents deployment of renewable technology at close to 10GW/year – scales of deployment with few historic precedents.

Deployment for end user heating systems themselves will also happen at a tremendous rate with conversions of over one million sites in each year in some scenarios.

The changeover to Net-Zero heat requires a complex mixture of national, regional and city involvement, systems thinking and extensive digitalisation. Getting this mixture right could radically reduce cost and delivery times, and requires all stakeholder to take action in the near term.

New skills need be developed, with a refocus of existing expertise. This will require a change in mindset, to think ahead of time and put in place the infrastructure to develop those skills.

The Path To Zero Carbon Heat has been led by Mott MacDonald with support from a working group comprising Energy Systems Catapult, Engie, Leeds City Council, National Grid, Pinsent Masons, Delta-EE, University of Leeds, the United Kingdom Collaboratorium for Research on Infrastructure and Cities and the United Kingdom Green Building Council.

Deloitte Economist Comments on Latest Inflation Figures

An economist is an expert who studies the relationship between a society’s resources and its production or output. Economists study societies ranging from small, local communities to entire nations and even the global economy.

Debapratim De is a senior economist at Deloitte. He advises clients on macroeconomic developments in the United Kingdom and other advanced economies, and is an author of the Deloitte CFO Survey.

Deloitte Touche Tohmatsu Limited, commonly referred to as Deloitte, is a multinational professional services network with offices in over 150 countries and territories around the world.

Prior to joining Deloitte, De was a researcher in cryptography and applied mathematics at Microsoft. He was educated at BITS Pilani in India and at the London School of Economics.

Commenting on this morning’s inflation figures, Debapratim De, senior economist at Deloitte, said: “The rise in both core and headline measures of inflation vindicates the Bank of England’s decision to keep interest rates on hold in January.

Further rises would significantly reduce the chances of a rate cut in the near future.”

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