IHIF Day 1: Recession catalysts conspicuously absent

Uncertainty quickly is becoming the industry’s favorite word as experts analyze the economy’s current status and the headwinds to come, but one expert believes the current strong state of the industry could persist for some time. At this year’s International Hotel Investment Forum, taking place this week at the InterContinental Berlin, Thanos Papasavvas, founder/CIO of ABP Invest—a pension fund for those working in the government and education sectors—said specific macroeconomic factors that traditionally have led to recessions are conspicuously absent, but he doesn’t advise letting your guard down.

During a session titled “Navigating the Storm: An Economic and Geopolitical Debate,” Papasavvas eschewed traditional baseball metaphors for nautical imagery as he ranked the factors that have led to downturns in the past. Papasavvas likened the recent global financial crises to a hurricane, and said storms offer telltale signs before they arrive.

Specifically, he pointed to multiple instances where the Federal Reserve altered interest rates, instigating a recession. In one instance, following 9/11 and the Iraq War, the Federal Reserve cut interest rates, and Papasavvas said he considers this the beginning of the global financial crisis that would occur in 2007. In recent years, however, ongoing quantitative easing and low interest rates across most major central banks have led to lower liquidity across the board, as well as increased technology investments and growing globalization efforts. Papasavvas said these trends, in conjunction with the global financial crisis, have created more inequality worldwide and criticism of the European Union.

“This is why it was important for the Federal Reserve to increase interest rates as it has been doing … and it may increase rates again to add to that drive of power should a recession come to pass,” Papasavvas said.

Rock the Boat

According to Papasavvas, the underlying data points to these trends exist mainly in developing countries, with two outliers: The U.S. and the U.K. In his estimation, the election of President Donald Trump and the U.K.’s vote to commence with the Brexit are two unexpected consequences of the global financial crisis.

But what, if anything, will come of this? Is the global economy heading into another hurricane? Papasavvas doesn’t think so.

“Hurricanes like those don’t happen that often,” he said. “More importantly, economic or political hurricanes only happen when you don’t expect them, and right now policy makers are watching factors and easing interest rates in response.”

Is the economy moving into a calmer environment, then? On this, too, Papasavvas disagrees. He expects elevated uncertainty to continue to establish itself as a major trend. He pointed to a period from 1993 to 1996 when low levels of volatility led to changes in interest rates, ultimately creating a global financial crisis. In essence, periods of comfort can create periods of unrest.

“As of 2017, we’ve never had so many days of sub-volatility, and the after effect is going to be considerable,” Papasavvas said.

Why Worry

If you’re concerned, Papasavvas would argue against it. One of the biggest fears facing global financial markets right now is a potential weakening or slowdown in money coming out of China, which is currently growing its gross domestic product roughly 6 percent a year. This is a respectable number, but it is considerably less than the double-digit growth the country had been putting out year after year. According to Papasavvas, this isn’t important.

“The overall size of China’s economy is many times larger than it should be,” he said. “A 6 percent growth rate of a huge pie is better than 10 percent of a smaller one.”

He also dismissed concerns of an ongoing trade war between the U.S. and China because he expects President Trump to shift his attention to competing with Germany.

“Trump wants to come back in 2020, and if the U.S. goes into a recession he won’t make it,” Papasavvas said.

So how would Papasavvas quantify the level of risk in the current market? Sticking to his wind analogy and using a Beaufort Scale, which rates wind in strength from zero to 12, Papasavvas ranked issues as follows.

Economic: 3-4 Papasavvas is not concerned because the global economy is unlikely to run into a disaster when one is expected. With market leaders overseeing changes in the economy, an unforeseen event is more likely. Political: 4-6 Should British Prime Minister Theresa May successfully navigate Brexit and Trump shift his focus from China to Germany during the 2020 elections, Papasavvas expects things to stabilize. Social: 4-6 While this number matches Papasavvas’ concern for the political environment, he said it potentially could reach a 10 if markets underperform, leading to populism and rising inequality.

“This industry is at the pinnacle, the intersection, of the economic, political and social developments,” Papasavvas said. “I do expect interest rates to remain low, but in a slightly elevated political and social environment.”

Predicting President Trump’s actions can be a dubious business at times, but Papasavvas upped the ante further by forecasting a completed Brexit, regardless of delays or changes in terms. He argued that threats of a shift in power to the U.K.’s democratic Labor party and a potential second referendum will help British Prime Minister Theresa May guide the process to a conclusion.

“The impact will be significant across many major countries, and it creates opportunities for foreign investors and other investments,” Papasavvas said.