Professional Pilot, October 2016

35 30 25 20 my became addicted to easy credit By mid 2016 Chinas debt reached nearly 225 of GDP This is not troubling in itself Debt in the US is at roughly the same level However American banks have reasonably sound lending standards the real estate bubble of 2000s notwithstanding Chinese banks do not A lot of their lending went to so called zombie companies many of them state owned enterprises in real estate and commodity industries like steel aluminum concrete and chemicals Unable to survive on profits many of them have been borrowing just to pay the interest on previous loans This has left Chinese banks sitting on an estimated 1 trillion in loans that can never be repaid Official figures say that only 175 of bank loans are nonperforming More objective estimates put the number close to 20 This has investors worried making it harder for banks to get the capital they need to clean up the mess The Bank for International Settlements tracks the gap between credit and GDP It warns that a level above 10 foretells a crisis in any of the 3 years ahead In China it is 301 So far the Chinese government has made only half hearted efforts to deal with the situation The next global recession will not end in China as the last one did It just might start there Bottom line We see a recession on the horizon and China plays a key role So will there be a worldwide recession soon Probably Thats what our figures and our research shows Eventually 82 PROFESSIONAL PILOT October 2016 even the most robust demand dries up and GDPs begin to shrink That is just how economies are As to when it will come and how bad it will be we cannot be sure There is a lot weighing on the global economy at the moment Real growth forecasts have been declining for most countries since at least Q2 2015 They are off in the United States the Euro area China Japan in advanced and emerging markets alike Interest rates are negative in most developed countries as low as 4 in the US and Germany They have remained there since 2007 in Japan and Germany since 2009 in the US with little benefit to economic growth US inflation was only 08 in the 12 month period ended in July 2016 and forecasts stubbornly refuse to reach the 2 targeted by the Federal Reserve In Europe it was only 02 this July This is not a sign of healthy growth The Purchasing Managers Index a predictor of future economic performance is dropping fast in the US and exports to 4 of its 5 largest trading partners have declined The 5th was Britain which is likely to import less in the years ahead The post Brexit strength of the US dollar on foreign exchange markets further threatens to stifle exports from the US China and many other countries whose currencies are loosely pegged to it The signs of a gathering storm have been building for a long time Claudio Berio head of the Bank for International Settlements warned not long ago The financial markets are equally concerned Bond yields are at alltime lows evidence that investors are not in a mood to take risks So far the US yield curve the spread between 2 year and 10 year Treasury securities is predicting continued growth around 2 However Deutsche Banks bond based economic model says there is a 60 chance of recession in the near future That will grow to 70 if the yield on 10 year Treasuries gets much lower The current trend says it will So that is the default forecast The next recession is likely to begin in the next 2 years On average recessions post World War II have averaged about 1 year and 10 months so lets make that our expected duration How bad will it be this time That depends almost entirely on China as it faces some difficult problems and there is little clear evidence that it has the political will to deal with them effectively And with interest rates in the minus column China has fewer tools than usual to mitigate a downturn like the rest of the world Yet the Chinese government has a record of doing whatever is required to stave off disaster If it responds effectively this time the coming recession should be no worse or longer than average If not all bets are off But the odds of a worldwide recession like the last one are less than 1 in 10 probably much less Professional pilots can take some comfort in this The global economy looks rocky So does the bizjet market But there is little chance of returning to the dark days of 2009 and 2010 when corporate aircraft fleets were spending more of their time on the ground and a few were shutting down altogether Instead we look ahead to a time when companies must scrabble for every deal they can get This means more executive travel not less and more air time for corporate aviators In a challenging global economy it is likely that business aviation will continue expanding for many years to come China labor force 40 15 10 05 00 05 10 15 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 Owen Davies is a veteran freelance writer and was senior editor at OMNI He now works as a futurist at Forecasting 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