The threatening global economic recession has been a growing issue in the past several months.
By
Sri Hartati Samhadi
·5 minutes read
The threatening global economic recession has been a growing issue in the past several months. Economic experts and agencies predict that the potential global recession triggered mainly by the Sino-American trade war may be even worse than the 2009 Great Recession and the 1930s Great Depression.
Economic recession is a condition of economic contraction (i.e. minus growth) for two consecutive quarters. Global economic conditions are worsening, with the International Monetary Fund assessing that 90 percent of world economies are anticipating a slowdown. This is in contrast to the condition just two years ago, when two-thirds of the world were experiencing accelerated growth.
A number of international agencies, including the IMF, World Bank, UNCTAD, OECD, WEF and other bodies, have lowered their global economic growth forecasts in the past year. Slowdowns are seen in several big economies such as China, the European Union, Japan and South Korea. China faces the risk of growth below six percent, its lowest in the past three decades.
The US economy is still growing, but signs of a recession are increasingly visible in the form of an inverted yield curve, namely a situation where long-term obligation yield is lower than the short-term. Among G-20 countries, five (the UK, Italy, Germany, Mexico and Brazil) are on the brink of recession. Of the countries considered among the Fragile Fibe by Morgan Stanley in 2013, one (Turkey) has officially entered a recession and the other four (Indonesia, India, Brazil and South Africa) are experiencing slowdown.
Recession probability
Despite slowdown threatening the global economy, there has yet to be any agreement on the recession probability in 2019 and 2020. The IMF does not see a recession as imminent, however it warns that a recession in the US could cause a recession in the EU and Japan, before triggering a global recession. UNCTAD sees a global recession as inevitable. Moody\'s Analytics predicts a global recession to occur in the next 12-18 months.
A positive note in all of this is that the slowdown is limited to manufacturing and trade. It has yet to spread to services, household income and spending. Part of the global economy is still booking growth. Jobs are still growing in the US and Europe.
To protect their economy from impacts of global economic slowdown, several countries have implemented counter-cycle fiscal policies by disbursing stimulus packages, widening fiscal deficit and loosening monetary policies by decreasing interest rates.
Steps taken by central banks, including the US Federal Reserve, to decrease interest rates and hopes of a Sino-American agreement on the trade war brought forward optimism and strengthening in financial markets in the past several days. This positive sentiment was supported by stability in key economic indicators in several countries.
The global economic slowdown this time is also deemed as more complex and systemic than before.
The question is: how long will this last? Many see this recession as different from the 2009 Great Recession and the 1930s Great Depression. In the current case, the World Bank cites, global trade growth has been at its lowest point in the past 10 years. Trade crises usually have bigger and longer-lasting effects on the heart of global economic activities. The global economic slowdown this time is also deemed as more complex and systemic than before.
At the same time, business players\' trust is also plummeting. So is investment in both developed and developing countries. Problems of government debts in developed and developing countries further amplify the difficult situation that grips the global economy. Meanwhile, corporate debt default rate is also on the rise.
Different from previous recessions, this recession is deemed as self-inflicted, triggered mainly by Trump\'s protectionism in his attempts to implement his slogan of "Make America Great Again", which led to trade wars between the US, China and several other countries.
Resistance to globalization, the growth of populism and the increasing trend of protectionism in trade regimes have hit global manufacturing and trade and, eventually, global economic growth.
Global trade is predicted to grow at only 1.2 percent in 2019, the lowest it has been since the 2009 global financial crisis. In 2020, trade is predicted to grow at only 2.7 percent, lower than the earlier projection of 3 percent. IMF managing director Kristalina Georgieva warns of the risk that this economic tension may last for "one generation" and lead to the destruction of global trade and supply chain.
Collective global movement
Leaders of global institutions such as the IMF and World Bank deem that global coordinated steps would be necessary to prevent a global economic recession from transforming into a full-scale global recession. High hopes are pinned upon the US and China to stop their trade frictions.
The EU also worries over a full-scale transatlantic trade war as its disputes against the US on aviation subsidies, vehicle tariff and digital tax are heating up.
The situation will remain difficult in 2020, especially if the Sino-American trade war continues into new chapters. The EU also worries over a full-scale transatlantic trade war as its disputes against the US on aviation subsidies, vehicle tariff and digital tax are heating up.
Efforts to overturn threats of recession depend on the ability of governments and global central banks to trigger economic growth and prevent slowdown. There are worries that the global economy will be drowned in recession without any lifesaver as normal policy instruments, such as monetary loosening and fiscal stimulus, may not be enough or effective.