- October 17, 2019
- Posted by: Ramkumar
- Category: Strategy
Signals of an Economic slowdown are visible
There are many indications for the world moving towards a protracted economic slowdown. Some analysts have even gone to an extent that we are already in the early stages of a slowdown.
Whenever there is an uncertainty, we look at the historical trends and then try to identify patterns which are similar to the current situation.This helps us to predict an event with better accuracy. The analysts are comparing the current economic slowdown with previous recessions of 2008 and 2002 to identify any similar patterns to predict whether the current economic slowdown will plunge into a recession.
In the case of an economic recession, the first predictor for an analyst is the inverted yield rates.This basically means that long term bonds will yield higher interest rates than short term bonds.This means that investors are not confident about the immediate and short term prospects, hence want to park their investments in long term bond instruments.
Emerging Markets are facing a slowdown
- The previous two recessions – Dot com burst and sub prime crisis depressed investor confidence and suppressed business opportunity.US and developed markets were the most affected in these recessions.At the same time, emerging markets, especially China and India were growing very fast.Hence these markets were able to offset the negative growth in developed markets.
- China became the global manufacturing hub as chinese products were very cheap.India became the offshoring hub for IT services that provided labour at cheaper rates.Hence many US and European companies started to establish their businesses in China and India.This helped them to increase growth and generated wealth for the businesses.
- Today the situation has become opposite.The emerging markets are in the midst of a protracted slowdown. Chinese economy is affected due to high tariffs posed by US as a result of US China trade war.Today developed markets have become protectionist and are opposing to globalization.
Everyone is prepared in this economic slowdown
- The previous recessions emerged as a shock to most of the businesses. They did not anticipate it earlier.As a result they were not prepared. Management teams were not experienced to handle such situations.Hence they did not react quickly and most of them did not have a contingency plan.
- This time the situation is different.Economists have predicted that there would be a slowdown around two years back.This gave enough time for most of the companies to reallocate their resources and formulate the right plans.As and when the recession hits, most companies will have a plan A and also contingency plans B and C.
- The only fear is that almost all companies will reduce costs, block all investments which will bring the global demand down.This can trigger a V shaped demand curve.
US will be the least affected this time in current economic slowdown
- When we revisit the last two recessions, it was crash of US markets that brought the world to the recession.This also gave us a new quote, “When US sneezes, then the world catches cold”.
- This time the situation is different.The US economy is booming and growing fastest compared to other major economies.Other economies like China, UK, Japan, Germany and Italy are underperforming.Countries like Germany are already in the midst of a recession.
- There are two scenarios here.The first scenario would be that US can insulate itself from the rest of the world.In this situation, the economic slowdown will be temporary and can recover.If US also goes through the recession, chances are that it would be the last major economy to join the other economies.When that happens, then the economy will take a bowl shape curve at the end when US falls into the recession.
- In the current economic slowdown, one thing is certain.We are in the technology age where the potential and adoption of technology in the business is all time high when compared to any other era.The untapped potential of technology to deliver economic progress has never been greater.
- The new age technologies like Cloud, Blockchain, IoT and AI have huge potential to deliver economic progress. Most industries have barely scratched the surface of what they can do with these technologies in order to drive innovation and generate wealth.
- Hence whatever happens, Technology should always have a demand.