World Recession

As world stares at recession, there is need for coordinated policies by major economies

The world economy is on the edge of a recession that can affect the standard of life of billions of people through jobs, wages, price stability and uncertainty. So who is going to save the world economy?

World-Recession

World GDP was at 3.8 per cent in 2017, fell to 3.6 per cent in 2018, and is now projected to be 3.2 per cent in 2019.

The annual data for the last two years, and also quarterly numbers on world economy, trade and capital flows suggest that the world economy is on the edge of a recession. World GDP was at 3.8 per cent in 2017, fell to 3.6 per cent in 2018, and is now projected to be 3.2 per cent in 2019.

The two major groups — 39 Advanced Economies (AEs) and 23 Emerging Economies (EEs) — have been experiencing downturn for the last two years. While AEs are projected to grow at 1.7 per cent in 2019 from 2.4 per cent in 2017, EEs are set to experience 3.8 per cent growth in 2019 from 4.8 per cent in 2017. Though the IMF projects a better picture for AEs (3.5 per cent) and EEs (4.5 per cent) in 2020, it is difficult to predict given the geo-political uncertainty, escalating trade war between US and China, and lack of consensus among the G-7 and G-20 member countries to push world trade and growth. Investors are worried about the slump and that is clearly reflected in capital flows and stock markets across the countries.

Growth and trade go hand in hand. In fact, the spectacular growth of the world economy between 2003-2008 till the Global Financial Crisis (GFC) was well supported by world trade. However, world trade growth has been shrinking since 2017 — it fell to 3.7 per cent in 2018 from 5.5 per cent in 2017 and is projected at 1.6 per cent in 2019. The growth of trade volume for AEs is projected to be 1.6 per cent in 2019 from 4.4 per cent in 2017 whereas for EEs trade is expected to grow at 1.5 per cent in 2019 from 7.4 per cent in 2017. Though the IMF has forecasted an upward projection for world trade in 2020, there is great uncertainty due to the ongoing US-China trade war.

Individually, the world’s top 10 economies are slowing down. While the US, the largest economy of the world, has a projected growth of 2.3 per cent in 2019 from 2.9 per cent in 2018, China is growing at its slowest pace in the last three decades — thanks to the US-China tariff war affecting trade worth billions of dollars. Though different factors have been at play resulting in slow growth in each of these big economies, a global slump in the manufacturing sector, weak global sales in automobiles and electronics, and a drop in business confidence — owing to uncertainty in trade and investment — are facilitating the continuous slide.

For example, Germany, the world’s fourth largest economy, relies heavily on automobile exports to the US and China. The British economy is shrinking mainly because of the fears of a chaotic Brexit without cutting a deal to protect its trade. Italy’s downward trend is due to high unemployment, weak productivity, huge debt and regular political upheavals. Brazil is undergoing high unemployment and weak industrial production.

As the US-China tariff war is escalating — especially in the last few months with both countries resuming and dropping the bilateral talks intermittently — the world economy is undergoing immense uncertainties. And, as Bloomberg reports, this uncertainty could lower world GDP by 0.6 per cent by 2021. A solution to the tariff war looks like a bleak possibility — even as the US puts conditions on China, such as resolving the mass protests in Hong Kong. The protests, on since June 2019 in Hong Kong, Asia’s financial hub, are denting the confidence of investors and businessmen.

Hong Kong’s GDP and exports have been worst affected in FY 2019 due to setbacks in Asian manufacturing, trading and investment.

Further re-imposition of US sanctions on Iranian oil not only affected Iran’s economy and price levels, leading to a weak currency, but it also led to disruptions in the supplies of oil and oil price volatility. Both India and China, the two largest energy consuming countries in the world, are badly affected, as both countries are among the largest importers of Iranian crude on favourable terms. All these uncertainties are supplementing the already existing difficult situation in the Indian economy, that is, lack of aggregate demand. Though the US-China tariff war gives an opportunity for Indian exports to export more to both countries, we have failed to capitalise so far.

In such a scenario, when the world economy is staring at a recession, it is increasingly important to strive for international cooperation through forums like the G-7 and the G-20 to revive world trade and growth, like they did after GFC. Though the G-7 leaders called for boosting globalisation through efficient and fair trade, there is no such commitment to arrest protectionist measures.

In fact, they also expressed concern on how to safeguard the rule-based trading system led by the World Trade Organisation (WTO) through reforms and modernisation, improve intellectual property protection and a quicker settlement of trade disputes.

Crucially, the G-7 leaders made a commitment to reach an agreement that simplifies regulatory barriers to trade and modernises international taxation within the framework of the OECD in 2020. The US and China, at the G-7 forum, also recognised the importance of bilateral talks to resolve trade issues rather than slamming tariffs on the opposing country or by pressurising businesses of the home country by withdrawing operations from the opposing country.

The world economy is on the edge of a recession that can affect the standard of life of billions of people through jobs, wages, price stability and uncertainty. Though it is not a crisis situation like 2008, there is an urgent need for international cooperation for globalisation, resolution of trade conflicts and the peaceful resolution of geo-political uncertainties. Moreover, there is a need for coordinated fiscal and monetary policies by major economies, like the G-20 members adopted after GFC. But unfortunately, the credibility of even the G-20 and WTO is at stake. So who is going to save the world economy?

Source: The Indian express | Written by Pravakar Sahoo