The US economic expansion is now the longest on record. Photo: Michael Brochstein/SIPA USA/PA Images

Sometimes it’s a good thing when economics and finance folk talk a lot about the next recession. Their concerns may temper the sort of exuberant or even reckless behaviour that normally precedes one. This may not be one of those times however.

As of this month, the post-financial crisis expansion has been underway for a decade. In the US, it is the longest since records began in 1854, but it is losing momentum. In Europe, which succumbed to a second crisis in 2011, the expansion is younger but weak. In countries that avoided the financial crisis directly, including Australia, Canada and China, economic growth is flagging. While worries have been widely aired this year, there do not seem to be conventional reasons to expect an imminent end to the expansion.

Note, though, that few recent recessions have been conventional. In the US, only one of the last four recessions has been, that is, triggered by policies designed to tame excess demand and inflation—and that was in 1981/82. The other three had their unique circumstances but were all precipitated by unpredicted financial shocks. An important trigger for the 1990/91 recession was the regulatory and real estate response to the savings and loan crisis. The 2001 recession unfolded in the wake of the bursting of the dot com bubble. The much longer 2008/09 recession was of course down to the crisis over mortgages and leverage.

The next recession is also very likely to have financial origins.

According to the Bank for International Settlements, the central banks’ central bank, on one measure, the global financial cycle (comprising inflation-adjusted credit flows and house prices, and the credit share of GDP) peaked in 2015/16, and started to roll over in 2017 in countries accounting for just over a third of world GDP. These include advanced economies that avoided the financial crisis, China, and emerging market economies, and we can trace slackening demand conditions in these areas directly to this cyclical shift. Non-financial corporate debt in China has started rising again after a brief hiatus, and household debt as a share of disposable income now exceeds that in the US. High corporate debt levels in major emerging markets such as Brazil and Turkey also create vulnerabilities. Rising indebtedness though is…

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