The global economy is showing growing signs of growth deceleration which is already negatively impacting on both financial markets and the real economy. According to the Financial Times, the global economy has entered a synchronised slowdown that may be difficult to reverse in 2019. After years of relative stability experienced by the financial markets, heightened volatility is creating deep uncertainty once again.
Such a slowdown in global economic activity is happening at a time when government, corporate and consumer debts are at a record high level - and rising. The US Federal Reserve (Fed) has already started to tighten the monetary policy and the European Central Bank (ECB) also now wants to discontinue its years-long negative interest rates which did not really work out as it was designed to be. Such a policy reorientation by the leading central banks has serious implications for costs of debt servicing. This will put a brake on government, households and firm spending and investment plans.
The IMF Chief Christine Lagarde weighed in to warn that the global economy would experience further slowdown and further downgraded the forecast for global growth made in January this year. She warned that if there be a sharper than expected tightening of financial conditions, that would create a very formidable challenge for many governments and companies to refinance and serving debt. Such a situation would amplify through exchange rate movements and financial market corrections.
The IMF (International Monetary Fund) has cut its global growth rate forecast for 2019 to 3.3 per cent, a decline by 0.2 percentage point from the forecast made in January this year. The IMF Chief Economist described the situation a delicate moment for the global economy. The IMF cites a US-China trade war and a potentially disorderly UK exit from the EU as the key risk factors.
But there are other factors involved in contributing to the current global economic deceleration if not a recession. These factors include higher interest rates, global trade tensions and excessive debt burden and will further fuel market uncertainty. The very low to even negative interest rate regime over the last decade largely kept the major economies of the world moving. Now the central banks simply cannot move away from that interest rate regime rendering them incapable of dealing with any economic downturn or recession. The IMF Chief Lagarde herself opined "Many economies are not resilient enough. High public debt and low interest rates have left limited room to act when next downturn comes, which inevitably it will''.
After years of relatively stable economic performance by global economy and financial markets, mostly financed by cheap money provided by the central banks, heightened volatility is creating uncertainties once again. Some central banks, in particular the US Federal Reserve, have been reversing their cheap money policy and moving towards a more realistic interest rate policy causing to hobble a rather bull market. As the US interest rate started to rise, this caused stocks and bond markets to face a strong headwind in 2018. Combined with rising trade tensions and very high levels of debt, this is creating a very volatile situation. Also, money saved from President Trump's tax-cuts appears to have rather stimulated the very kinds of financial speculation that led to the 2007-08 Global Financial Crisis (GFC). Such speculative activities were also aided by the cheap money policy.
Meanwhile, the Director General of the WTO, Robert Azevedo released the latest report on April 02, containing the forecast which points to a significant slowdown in global trade impacting on growth. He pointed out while trade grew at a rate of 4.6 per cent in 2017 giving some optimistic outlook for the future, that is not the case anymore and the momentum has been weakening since the end of the last year. He emphasised that trade cannot play its role in stimulating growth in an uncertain economic climate which drives down investment and consumption. He now predicts trade will grow by 2.6 per cent this year. He obviously sees the principal reason being rising trade tensions while recognising there are other factors involved in the current economic slowdown process.
Over all, the global trade fracas has emerged as a leading factor in contributing to the current global economic slowdown as the US, China, the EU and other major trading nations are trying to position themselves for an emerging global trading system which may also result in a new world order. Such structural shifts in global economic order will lead to significant lead time needed to bring about the economic adjustment process to work itself out. It is most likely that the current trade disputes will take time to be resolved creating further uncertainties which are likely to be more pronounced in 2019.
The slowdown of the global economy appears to be most visible in the European Union (EU) where growth indicators are very discouraging relative to the US or China. Germany, the biggest economy in the EU, is showing signs of economic contraction as reflected in various economic indicators though not yet into a recession, but Italy, the fourth largest economy in the EU, is now falling into a recession. European Central Bank (ECB) President, Mario Draghi said that both extra and intra Eurozone economies have slowed down, rather quite simultaneously which has not occurred since the GFC. He cited trade disputes and economic slowdown in emerging economies, including China, as negatively impacting on the Eurozone.
The US policy reversal on further interest rate hikes and China's stimulus to capital expenditure are somehow having a steadying effect. ECB President Draghi, however, put on a brave face while dealing with a rather quite worsening economic situation and outlined his policy options which included, like the US, to shelve the policy of monetary tightening and go for further stimulus packages. He went further to assert that the ECB had not run out of instruments to deal with the emerging economic situation. But the ECB hardly has much room to manoeuvre as it has already almost run out of any effective monetary instruments. The ECB's current problems are further compounded by internal dissensions between member countries.
Global financial markets are also jittery as reflected in an estimated US$10 trillion worth of bonds having moved into the negative yield area. Even a decade after the GFC the global economy has not returned to what is considered to be normal. Despite all the talking up, the US growth rate still remains below 3.0 per cent. With the continuous flows of cheap money from the major central banks, companies appear to not investing in the real economy, rather moving into speculative investments. Now very high levels of public debt are also constraining the advanced economies to use further fiscal stimulus as monetary policy instruments also remain constrained.
However, despite all the gloomy forecasts, Bangladesh appears to be one of the bright spots where, according to the IMF, the country is expected to achieve a growth rate of 7.3 per cent in 2019 but with a very slightly slower growth rate projected at 7.0 per cent for both 2020 and 2021. But trade tensions and uncertainties facing the global economy are likely to undermine Bangladesh's export potentials. To keep its growth momentum going, Bangladesh needs to stimulate private investment and consumption with measures to stimulate longer-term productivity growth.
Muhammad Mahmood is an independent economic and political analyst.
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