Monthly global outlook – the Bears are gathering for a global economic slowdown but will it be a crash?

Global economic slowdown - or tsunami?While the “B” word is the focus of attention in UK and cited as the cause of low productivity and a UK economic slowdown, there is a growing body of evidence outside UK that is indicating a global economic slowdown although few are yet predicting a crash.

According to the Independent’s economics writer Hamish McRae: “The European economy has pretty much ground to a halt – and this has very little to do with Brexit. If, however, the Brexit negotiations go badly, then the sky darkens – and not just across Europe.”

Certainly, the prospects across the world are looking gloomier.

Recessions tend to be cyclical and come at 10-year intervals, and it is now a decade since the global Financial Crash of 2008.

Arguably, much more important than Brexit is the fact that ten years on Central Bank intervention continues, there are enduring low interest rates and that many nations are still on emergency monetary policies. And there is now a huge mountain of debt that everyone seems to ignore.

US Nobel prize-winning economist Paul Krugman is one of those predicting that there will be a recession in America by the time Donald Trump comes up for re-election at the end of next year.

The second half data from 2018 suggests that global growth has peaked and reported the onset of falling demand for goods and declining factory output in China, Germany, Japan and South Korea, to name a few of the countries particularly dependent on global trade.

In Davos last month IMF managing director, Christine Lagarde, warned that the risks of a sharper decline in activity had increased. Earlier this month came a report from the WTO (World Trade Organisation) that its quarterly indicator of world merchandise trade had slumped to its lowest reading in nine years.

Several Central banks, including the ECB (European Central Bank) and the Chinese have been trying to stimulate growth and investment.

You may remember that both Paul Krugman and Kenneth Rogoff, who is professor of economics and public policy at Harvard University, predicted the 2008 financial meltdown although they were ignored at the time.

However, interest rates remain at rock bottom and debt has been creeping up. As Krugman says, “we came into the last crisis with interest rates well above zero, we came into the last crisis with debt substantially lower than it is now … and we came into the last crisis with substantially better leadership …”

Herein lies the problem.

The world has changed, perhaps as a result of ten years continuing pain since of 2008 and little prospects of respite in the future.  We have seen a rise in protectionism and “populist” movements, most notably in Italy, in Eastern Europe and in Trump’s America, in his sanctions threatened against China, and in tensions between the US and Mexico.

If, as Krugman predicts and Rogoff warn, another economic crisis is looming it is unlikely that we will see the same, co-ordinated government action as was made by the G20 in 2008 that staved off a complete economic meltdown. Although this time there is little left in the tank, especially given the low rates of interest and huge levels of national debt. I see the seeds of huge interest rate rises.

To quote Rogoff in a recent article in the Guardian: “Crisis management cannot be run on autopilot, and the safety of the financial system depends critically on the competence of the people managing it…. The bad news is that crisis management involves the entire government, not just the monetary authority. And here there is ample room for doubt.”

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