The inversion of the US yield curve for the first time since 2007 coupled with the trade tensions with China has signalled the possibility of a decline in global growth which could lead to slower global demand for crude oil and thus lower oil prices.
The United States economy had been signalling the world for an impending recession with analysts and economists airing opinions that the world should brace up for the next global recession, but the low concern levels hit a tipping point on Wednesday, August 14th after the yield curve inverted.
In the last 7 recession years in the United States, an inverted yield curve has been one of the final signs of a recession as empirical studies have shown that a high correlation exists between the inversion of the yield curve and a decline in economic growth for two consecutive quarters.
Since 1980, the average time lag between the yield curve inverting and the economy falling into recession is 21 months, according to analysts at Deutsche Bank, but it can take almost three years.
If history is anything to go by, Nigerian policy makers should be on the lookout for how this inversion affects the country.
Obinna Uzoma, Chief Economist at EUA Intelligence explained that Businessday MARKETS INTELLIGENCE
(Team lead: BALA AUGIE “the inversion of the US yield curve on Wednesday could lead to a global recession next year and the Nigerian policy makers must be prepared for a downturn in oil prices. When there is slower demand for crude oil in the US coupled with slower growth of the Chinese economy, oil prices are bound to suffer and thus, oil dependent nations, who have failed to do their homework, suffer.”
In the last Great Recession in the US, which spanned from December 2007 to June 2009, Brent spot price hit a low of $43.32 per barrel five months before the end of the recession coming from $92.41 dollar per barrel in November 2007.
Prior to that, in the Early 2000s recession which started in March 2001 and lasted for 8 months, oil prices hit a low of $18.8 per barrel dropping from almost twice its value 4 months before the start of the recession.
An inverted yield curve is a warning sign precisely because it tells investors about expectations for the future and not necessarily about the state of things right now. There are concerns that the economic sugar rush provided to American consumers by tax cuts last year are wearing off, while there is little sign of trade tensions abating.
The inversion of the yield curve occurred before each of the last seven recessions. The inversion has been coming for some time now, as the spread has been shrinking over the last several months.
