Hoping good sense will prevent a global economic recession

Hoping good sense will prevent a global economic recession

Sunday, August 18, 2019

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There is nothing inevitable about a global economic recession because the world has learned how to reduce the intensity of a downsizing and to head off the worst. The art of economic policy is not perfect. Economists may not know how to produce economic growth but they certainly know what will block economic growth. Periodically politicians and policymakers forget the lessons of the past. History is a good teacher but people are bad students and that is why we are destined to repeat it.

Unlike when the world was taken off guard by the 2008 economic crisis, the financial data suggest that the global economy could be on the threshold of a recession. If an economic recession does happen the signs have been there for at least a year. The International Monetary Fund (IMF) had forecast a slow-down in economic growth in 2019. In 2018 global foreign direct investment fell again, by 13 per cent, the third consecutive decline. While developed countries have seen the largest drops in FDI, flows to developing countries have also stagnated. The economies of Germany and the United Kingdom contracted in the second quarter of 2019 and industrial production in China grew at the lowest rate in 17 years in July.

The Great Depression of the late 1920s and 1930s was caused by extremely nationalistic trade policy which set off a series of competitive countermeasures. The main trigger was the protectionist trade measures by the United States (US) in the Smoot-Hawley Tariff Act of 1930 which raised already-high US tariffs on agricultural imports. Was there a warning sign? Yes, a state of mind of anxiety and uncertainty. The Wall Street Crash of 1929 was the greatest stock market crash in the history of the United States.

Now the parallels with the contemporary situation are pellucid. The Trump-instigated US-China trade war has raised tariffs on imports from China and before that on iron and steel. There is the threat of further tariff increases. That has created a global state of mind of anxiety and uncertainty. Are there warning signs? Yes. Last Wednesday was the worst day for the stock market in 2019. The Dow Jones dropped 808 points, the S&P 500 (SPX) declined 2.9 per cent and the Nasdaq (COMP) sank three per cent. The bond market, for the first time in over a decade, flashed a warning signal that has an eerily accurate track record for predicting recessions. The 10-year treasury bond yield fell below the yield of the two-year treasury bond for the first time since 2007 that 10-year bond yields fell below two-year yields.

Where the world is now is clearly a situation of being on the Titanic for the second time but still not looking out for icebergs.

What the world leant from the Great Depression was first, that recovery, and therefore prevention of global economic crisis, requires international coordination of economic policy among the most important economic countries. In those days it involved the US, Britain, France and Germany. Second, some country with enough power has to lead the process. In those days the US was the hegemon that imposed a solution which resulted in the IMF, World Bank, World Trade Organization and the G-7.

The problem is that today it would require either the US to lead or for there to be collaboration between the rival superpowers of the US and China. The US, unfortunately, seems to be willing to relinquish its role as world leader of a multilateral world order in favour of influencing the world by unilateral measures.

Hopefully, good sense will prevail.

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