The last global economic slowdown seems like only yesterday, mainly because the recovery there was after it was quite fragile and some countries benefitted from it to a minor extent. So when Christine Lagarde, the managing director of the International Monetary Fund, stated that global growth has lost its momentum since the start of 2019, leaving the economy in a “precarious” position, the alarm bells started ringing again.
Some economies, admittedly medium-sized ones and not leading ones, are still licking their wounds from the last recession and here we are, moving towards the next one. She did say that the IMF predicts that global growth is likely to pick up sometime in the second half of 2019 and in 2020. However, I am not sure that this prediction provides much comfort and is not likely to boost consumer and investor sentiment and reduce uncertainty.
That things were not moving well has been evident for some weeks now. The world’s central bankers, the chairman of the Federal Reserve and the president of the European Central Bank, have stated as much. In fact, both of them have decided not to raise interest rates in the US and in the eurozone respectively, in spite if the fact that in 2018, there were many who stated that they were expecting increases in interest rates in 2019.
Many analysts do in fact accept that the global economy has benefitted and continues to benefit from the patience of major central banks. In support of this, there has also been an increased economic stimulus by the Chinese government.
One hopes that policymakers and decision makers hear these alarm bells loud and clear and take the appropriate actions
The reasons for this uneasiness are various. Brexit is one such reason. We have gone past the first Brexit date and we are only a week away from the second deadline. However, no one really knows what is going to happen. Will there be a no deal? Will there be another extension of the deadline? If so for how long? Will there be some sort of deal that will satisfy both the EU and the UK? What will be the real impact of a Brexit?
The situation around Brexit has been described as chaotic simply because no one has anticipated what the impact of Brexit on the global economy would be.
A second reason is the tensions on international trade. Even here no one really knows what will be happening. There are days when an agreement between the US and China looks possible, and there are days when the discourse becomes aggressive again. Even if China and the US do agree to avoid a trade war, there could still be tensions between the US and the EU or between the US and Asian countries other than China.
It has been estimated that an increase in tariffs by 25 percentage points on all goods traded between the US and China would reduce annual output in the US by up to 0.6 per cent, and up to 1.5 per cent in China. That is how risky a trade war is.
The third reason is that a number of large global corporations have been increasing their market power, to the extent that they are imposing their price on the market.
This generates uncertainty among those businesses who are not part of this game. Governments have sought to make sure that such global corporations pay all the taxes due and do not avoid tax in any way.
However, they have done little to control the monopolistic power of these corporations.
What emerges from all this is that the causes for this global economic slowdown are self-inflicted. We could all have done without them. Worse still, with interest rates being so low and public debt being so high, there is little space for meaningful action by governments.
This makes the alarm bells ring even louder.
One hopes that policymakers and decision makers hear these alarm bells loud and clear as well and take the appropriate actions.