Q-review 2/2017: Towards global recession

We have published a new business cycle forecast. We argue that instead of a renewed global expansion, we are heading to a recession of a global scale. We concentrate on economies of China and the United States as they are crucial when determining the direction of the global economy.

The liquidity operations by the global central banks do, however, make timing of the start of the recession exceptionally difficult at the moment. Partly reflecting their actions, the risk of a global asset market crash has grown.

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Recession warning for the US

Our CEO Tuomas Malinen published a piece in Huffington Post explaining why the US economy is heading to a recession. You can read the entry here. For the reasons listed in the post we have lowered the Deprcon reading for the US to 2. This means that we expect that the US economy will fall into recession within the next to quarters.


Q-review 1/2017: The risk of a global crash


  • International debt issuance stalled in 2008 and has never recovered. To cope, central banks and governments created a massive flux of artificial liquidity that led to a feeble economic recovery.
  • Asset valuations are not in line with the underlying real economy, which creates a risk for a market crash in the near future.
  • Economic forecasts may be seriously biased at the moment.


It is well known that the recovery from the financial crisis of 2007 – 2008 has been nascent all over the world. Several attempted explanations for this slowdown have been provided, including declining aggregate demand, debt-overhang and productivity slowdown.

Our analysis yields a more detailed outcome: The crisis of 2007 – 2008 reversed the trend of financial globalization, which has undermined global growth. The pull-back in financial globalization has been masked by central bank-induced liquidity and continuous stimulus from governments which have created an artificial recovery and pushed different asset valuations to unsustainable levels.

This implies that we live in a “central bankers’ bubble”. This is something we have been warning earlier (see, e.g., Q-review 1/2016). In this report, we will show why the central bankers’ bubble is such a big problem for the global economy.

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Q-review 3/2016: Where from here?

The decision of Brits to leave the European Union, the Brexit, was a shock to many, but its implications for global markets has not been fully understood yet. Global trade and earnings have peaked and strong signals tell that the US economy has already passed the peak of the current upturn. This may harm the struggling economy of Finland.

There are limits in the ability of the central banks to stimulate the economy and we are now close to those limits, a fact, which has not yet been fully understood. The “stress” tests conducted by the European Banking Authority were fundamentally flawed and European banking sector continues to be the biggest threat to global financial stability.

We forecast that the US economy will grow 1.7 percent this year while the economies of the Eurozone and Finland will grow 1.4 and 1.2 percent this year. ‘

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Q-review 4/2015: Where is the world economy heading?

In our new business cycle forecast, we analyze the state and the near future of the global economy. Predicting the turning point of a business cycle is notoriously difficult. However, several real economic and financial indicators currently point to a conclusion that peak of the global business cycle may already have been passed or it may be at hand.

Downloand Q-review 4/2015.

Risks of a financial crisis build up

In our latest business cycle analysis we estimated that the likelihood of a new global financial crisis is 35 % for the next 12 months. There were several reasons for this. The banking sector in Europe is still very vulnerable. The share of non-performing loans on the banking sector of several European countries is very high (over 15 percent). In general, the economy of Eurozone was threatened by a decline in the industrial production associated with high unemployment in the crisis countries, and by the insolvency of the European banking sector on the other.  There was also the risk of a Grexit which we estimated at 50 %.

Grexit would pose a big threat for the Eurozone and global financial system for two reasons. First, after Grexit, the possibility of the exit of another country would raise in the future. This would increase uncertainty which would lead to increased stress and volatility in financial markets. The likelihood of the bank and capital runs would also increase. Secondly, Grexit would also lead to reconsiderations on the role of euro in the foreign exchange markets (euro is the second most traded currency in the world). It thus practically impossible to foresee all the effects that the exit of Greece would bring in its wake. For Eurozone, it could be the beginning of the end. At least, Eurozone would never be the same.

Now, Greece is in a heightened risk of exiting the euro (our esimate is 60 %) and China is experiencing a stock market crash. By itself, stock market crash is not a reason to worry, but the financial system is China is at questionable footing (see Q-review 4/2014).  Also, if stock market panic spreads to neighbouring countries or to major stock markets (like Australia) it could cause serious losses and panics also on other markets, like the repo and junk-bond markets. Due to highly levered markets, panics in them would lead to big losses to banks.

Each of the aforementioned events carries the potential of inflicting large scale damage to the global financial system. Their combination has the potential of causing a systemic meltdown similar to that of 2008. Therefore, the likelihood of a new global financial crisis has risen 45 % for the next 12 months. If Greece were to exit and/or the stock market crash of China would spread to Hong Kong or the neighbouring countries , the likelihood of global financial crisis would increase further.

Business cycle analysis: Q-review 1/2015

Q-review 1/2015 published! Is Europe recovering?

Some positive signals have emerged from Eurozone during the spring but a closer exploration reveals some alarming details.

We go through the prospects of economic recovery in the Eurozone. We find that the recovery is threatened by a decline in the industrial production associated with high unemployment in the crisis countries, and by the insolvency of the European banking sector on the other.

Download the publication here.


Q-Review 4/2014 published!

The economy of the U.S. is showing strength, but other major economies are struggling to obtain growth. According to our forecasts, the economy of the U.S. will grow 2.5 percent next year while the Eurozone and Finland will grow around 1 percent next year. China is facing increasing financial stress, which will test the ability of the government of China to reform the economy.

The risk of a breakup of the Eurozone is about to be flare up again. European central bank is planning to launch its own quantitative easing. Unfortuntely, the hope that the QE would be the “savior of the euro” is misplaced.

In spite of the massive QE-program of the central bank of Japan (BoJ), Japanese economy slipped back in to recession in the second quarter of this year. The renewed problems of Japan reflect the limits of QE.

Russian currency crisis can trigger a financial event, if the crisis is prolonged. Financial crisis in the Russia could also spread to other BRICS -countries or to Europe. Possibility of a credit event in the BRICS or in Europe, unprofitable investments in China, slow growth in the euro area, and the high leverage among high risk products in the global financial system (see Q-Review 2/2014) have increased the risk of a renewed financial crisis.

Read the full report here.

Q-review 2/2014 published!

According to our forecasts, the world economy is turning to a path of more robust growth during this year. We forecast that this year the real GDP will grow 0.9 percent in the Eurozone and 1.6 percent in the U.S. The growth is impended by the risk misallocations caused by central bank interventions. The growing risk of war may trigger a global financial turmoil.

World economy has entered a strange new phase. Interventions by central banks have effectively underpriced the risk of several assets classes while at the same time economic fundaments have improved marginally and some have even deteriorated. What makes these tendencies worrisome is that periods of low volatility and high risk have frequently preceded financial crashes.

Currently there are several conflicts in the world that have potential to deliver a big blow for the world economy. To deliver such a blow, escalation of conflict needs to be in a level where it either has disrupting effect on the world economy or it causes a belief that it will become a major event for the global economy. If there would be a scare among investors about the fallout of the escalation of some conflicts, central banks would have little chances of stemming the panic, especially as their policy tools are almost exhausted at the moment.

Eurozone faces new threats as former core countries of the euroarea, Finland and The Netherlands, are having problems in achieving economic growth.  In Finland, the problem is more severe than in The Netherlands. Finland desperately needs an (internal or external) devaluation to regain her competitiveness in the global markets. Because the exit of Finland from Eurozone is highly unlikely, Finland is at risk of becoming one of the troubled economies in Eurozone within the next five years.

Q-review 2/2014


Q-review 4/2013 published!

According to our forecasts, the world economy is turning to a path of more robust growth during next year. We forecast the economies of the Eurozone and Finland to growth around 1.6 percent and around two percent next year. The US is forecasted to grow around 2.8 percent. World economy is recovering, but hidden market risks threaten this recovery.

There is a serious possibility that the measures taken by the central banks have already created a situation in which their actions increase rather than decrease financial instability. Especially banks in the Eurozone have patched their balance sheets with the “riskless” sovereign bonds of the peripheral Europe. It is thus possible that the normalization in money markets will lead to considerable losses for banks in Europe and, in the worst case, to a global Europe-born banking crises. However, the probability of a new crisis remains to be somewhat subdued.

Read the full report here.