Is a global recession on the way?

Three days ago we had some very bad news which has been scantily reported in the media, even in the international media. Those newspapers that did report it described it as a “global shock”.

For the first time since the start of the international economic crisis in 2008, manufacturing has shrunk both in the US and China, the world’s two largest economies. This has raised fears of what has been described as a ‘synchronised downturn’. The implications worldwide of such an occurrence are not too difficult to imagine.

Should Malta start thinking of possible measures that we can take to pre-empt a possible crisis?

In the US, the industrial index of manufacturing companies fell below the threshold of 50 for the first time in four years.

This threshold represents for American analysts the border line between boom and bust.

Moreover, new orders plunged 3.5 to 48.8 as a result of both weak foreign demand and reduced demand by the US Government.

This coincided with the development in China, where the same index fell below 50 as well.

In both countries, these numbers came as a surprise, especially since Japan is seeking to kick-start its economy through a very loose monetary policy, that some are referring to as a policy of printing money.

With the manufacturing sector shrinking in both the US and China, one can expect demand for raw materials and intermediate manufacturing products to drop, as would demand for services that rely on manufacturing. This will in turn have a negative impact on employment, causing a further shrinkage in other sectors.

This bad news was further compounded by the news that manufacturing in South Korea, India and Russia has also weakened more than expected.

Then it was the turn of the European economic locomotive – Germany. The International Monetary Fund halved its growth forecast for Germany to 0.3 per cent this year in the light of a continued high level of uncertainty in the eurozone.

The IMF also encouraged Germany to press ahead with further fiscal consolidation to allow its economy to expand and give the rest of the eurozone some breathing space.

The global background scenario is a report by the International Labour Organisation.

The ILO warned more than 208 million people across the world will be jobless in 2015, with employment rates unable to return to pre-crisis levels for another four years, while employment rates in advanced economies will only return to pre-crisis levels after 2017.

It claimed that “stagnating wages are adversely affecting demand, which in turn is dampening real investment, leading to poor job creation – reinforcing weak demand and so on”.

The ILO may have been too pessimistic in its assessment but it warned further that there may be adverse consequences on individuals and their families, which could “weaken previously stable societies, as opportunities to advance in a good job and improve one’s standard of living become the exception rather than the rule”.

The news this week seems to indicate that a global recession is on the way. I am purposely describing it as a global recession and not an international recession as it would appear that even China and the other emerging economies are likely to be affected.

It is certainly difficult to measure the possible impact of this on Malta.

So far, our economy has appeared to be resilient as also evidenced by the statements of the International Monetary Fund and the European Commission. It may yet prove to be resilient enough to withstand this new challenge. But what if it is not? Should we start thinking of possible measures that we can take to pre-empt a possible crisis?