Global economy is in a somewhat schizoid phase. There is definitely a hype, especially in the asset markets, about the prospects of the global economy. Markets are expecting a global growth to pick up leading to higher corporate profits.

However, the macroeconomic signals from two leading economies, China and the US, indicate that they are heading to a recession. A recession in either of them has the potential to start a global asset market correction, which can easily metastasize to a global deflationary recession.

The mature expansion of the US

At the very principal level, economic growth consists of two parts. The long-run trend, which is dictated by technological progress enabling continuous production growth, and the business cycle which is driven by the fluctuations in different short-run factors. From these short-run factors, the most prominent one is credit. In an upturn, both consumers and business use credit to expand their consumption and production. This creates a positive pulse in the aggregate demand feeding to more consumption and investment. At the end of the business cycle, the consumers and the corporations have loaded themselves with debt and they start to cut back their lending. Credit contracts feeding into a loop of diminishing investment and production.

In the US, the upturn has already lasted for eight years, which makes it the third longest economic expansion since the Second World War. More importantly, the shares of consumer and non-financial corporate total credit from GDP are beyond their former peaks (see Figure 1). These point to a mature business cycle for the US.