- October 13, 2019
- Posted by: Ramkumar
- Category: Strategy
The global economy is slowing down and analysts all over the world are anxious whether this slowdown will topple over to a global recession.
In the past week, the US China trade war seemed to move towards a positive direction when both countries struck a partial trade agreement.Further there are high chances of UK striking an agreement with European union over Brexit.
The bond market is in doldrums as trillions of dollars worth of bonds is yielding negative rates.The economy is expanding slowly and it is speculated that the slowdown will further spread in the future.
With all the above events unfolding, what are the chances for a global recession in 2020?
Some of the factors which could determine whether a recession can happen would be:
Global recession factor 1 – US China Trade war
- It has been close to 18 months since the trade war started and it has already put the global growth under pressure. Even though there has been a headway in the US China talks with Beijing signing up to buy more American farm products and US suspending another round of tariffs, the thorniest disputes still continue to be unresolved.
- US main issues still continue to be Intellectual property theft and forced technology transfer.
Global recession factor 2 – Manufacturing troubles
- The biggest victims of the trade war has been manufacturing sector.This has contracted the global manufacturing activity for six straight months.
- The auto sector has experienced a severe slump.This has affected German and Japanese economies which are the leading countries for global automobiles. This has caused businesses to cut back on its investments.
- The biggest question is whether the manufacturing slump will spread further and affect services sector too.
Global recession factor 3 – Geopolitical tensions
- The UK and European union have yet to seal a Brexit deal. The US Iran tensions reached a new high after a drone attack on Saudis oil fields.If this tension increases, then this will have an impact on the oil prices which will shoot further higher.
- Protests in Iraq continue, Turkey has recently launched an attack on Syria and marches in Hongkong for autonomy might further exacerbate the slowdown to recession.
- The South American economy is facing worst crisis with Argentina facing fiscal problem and Ecuador, Peru and Venezuela facing political problems.
- The protectionism is increasingly visible in major economies and anti globalization rhetoric continues to persist.
Global recession factor 4 – Margins Problems
- Global margins continue to plummet.This has lowered business confidence leading to cutbacks in capital spending.
- The reason for low margin is the high wages, low productivity and low pricing power. If margins continue to reduce, corporations will resort to major layoffs which will further knock the consumer confidence and spending.
Global recession factor 5 – Pressure on Central Banks
- To prevent recession, major central banks have reduced the interest rates to encourage spending. This move has still not improved customer demand.
- Many central banks like European central bank and Bank of Japan already have negative interest rates.
Global recession factor 6 – Tough Fiscal policy
- Governments all over the world continue to raise taxes to meet their fiscal deficit.
- Some governments are spending money and providing additional stimulus to restore growth.At the same time, countries like Germany and China are still holding back to meet their fiscal goals.
Global recession factor 7 – US Economy
- The US economy still continue to perform well and looks to be the most stable economy in the world. The fact that the most powerful economy in the world is in a good position can allay the fears of recession.
- The US economy is closed and insulated from rest of the world.This means that it can continue to expand even if global economy takes a hit.
Global recession factor 8 – Hiring continues to happen
The US unemployment rate is the lowest in past five decades. The low unemployment rates have not increased customer spending which still continue to be major area of concern.
Global recession factor 9 – China
- China can continue to play the role of a savior as it did in previous recessions. The only issue would be that this would further inflate the already high debt levels.
- China has reduced its reserves which could mean that there are chances for it to spend on infrastructure and other local investments.
- The previous global recession were due to correction of high prices like technology bubble in 2001 or housing bubble in 2007.In the current slowdown, inflation is low and stock prices are not in bubble.
- Hence though there may be a protracted slowdown, chances of global economy slipping into a recession seems low.