Global economic outlook, 2019-20: Synchronised global slowdown

The World Economic Outlook report published by the International Monetary Fund (IMF) on October 15, 2019 cut its forecast for global growth rate this year to its lowest level since the 2007-08 Global Financial Crisis (GFC). The IMF predicted that the global economy would grow by 3.0 per cent this year down from 3.6 per cent the previous year (2018). It also predicted that global economy would achieve a growth rate of 3.4 per cent in 2020 but with a caveat - this uptick would not be broad-based and durable. The newly-appointed Managing Director of the IMF Kristalina Georgieva has pointed out that the global economy is in the process of a synchronised downswing in 90 per cent of the world economy. She further pointed out that this was in contrast to the previous two years where 75 per cent of the global economy experienced a synchronised upswing.
Meanwhile, many independent economic research organisations concur with the IMF growth forecast. The Interim Economic Outlook (September, 2019) of the Organisation for Economic Cooperation and Development (OECD) indicated that the global economic outlook had become increasingly fragile and uncertain. Its global growth was projected to slow down to 2.9 per cent this year (2019) and 3.0 per cent in 2020. It also warned that this growth trend is likely to be accompanied by mounting risks of downward slide. The Global Business Policy Council also made its growth forecast at 2.9 per cent for this year, the same as the OECD forecast, but slowing growth through to 2023.
The IMF report indicated that the global big four, the US, China, the Eurozone, and Japan would not see any improvement in their growth rates over the next five years. The OECD Interim Economic Outlook made projections for these economies where the estimated growth rates for 2019 and 2020 for these countries/zone are as follows: the US at 2.4 per cent and 2.0 per cent respectively, down by 0.4 percentage point, the Eurozone at 1.1 per cent and 1.0 per cent respectively, down by 0.1 percentage point, China at 6.1 per cent and 5.7 per cent respectively down by 0.4 percentage point and Japan at 1.0 and 0.6 respectively down by 0.4 percentage point. The OECD report further added that the global economic outlook had become increasingly fragile and uncertain. It also observed that GDP (gross domestic point) growth was subdued and global trade was contracting.
Escalating trade disputes are increasingly impacting on both trade flows and investment. Protectionist policies as pursued by the Trump administration, which violate both the rules and the spirit of open and free trade, are threatening to bring multilateral trading system to a standstill. The annual meeting of the IMF and the World Bank held in the middle of this month in Washington, DC, clearly indicated these two institutions are entering into the final stage of their irrelevance as reflected in their admission of failure to keep the global multilateral system functioning - indeed these two institutions now are on life support for their survival.
More importantly, the current global economic environment creates policy uncertainty that flows on to weigh on risk sentiment in financial markets negatively impacting on the future growth prospects. Still uncertainty persists about the exact nature and timing of Brexit which further adds to uncertainty, hence uncertainty about European and British economic growth prospects. In fact, the IMF indicated that the US-China trade conflict would cause a decline in Global GDP by 0.8 per cent in 2020.
IMF Chief Georgieva echoed the same sentiment. She pointed out to the increasing 'fractures' caused by the escalating trade disputes and she further added global trade has already come to a near standstill causing declining manufacturing output and investment which would affect services and consumption. Ms. Georgieva then went on to add that the fall in global output could be close to US$700 billion in 2020 accounting for 0.8 per cent of the global economy which is equivalent to the Swiss economy.
Trade conflicts are no longer confined to the US-China alone, the conflict will further escalate to the European Union (EU). In response to the WTO ruling against a number of EU products ranging from Airbus to agricultural products, the US is now in the process of imposing tariffs on those goods. Now the EU is also waiting for the WTO ruling on Boeing to take counter-measures. A limited US-China trade deal has been agreed upon in the very recent time but it now appears that the deal is rather more a temporary truce rather than a beginning of the de-escalation of the trade war between the two countries.
Weakening of manufacturing output will lead to declining demand for labour resulting in declining household incomes and spending. There are growing concerns also about productivity crisis which could be further aggravated by labour shortages in developed economy and skill shortages in emerging markets. These are structural problems that are also contributing to slower economic growth outlook. Bangladesh as an emerging economy is symptomatic of the structural problem facing the country as reflected in skill shortages. This skill gap in Bangladesh will hinder future output growth despite currently the country is being set to achieving an estimated growth rate of 8.0 per cent for 2019 and 7.6 for 2020. This indicates that the education system in Bangladesh is failing to equip students with skills required for the workforce and this in turn will be working as a brake on achieving increased productivity, the key to achieving sustained economic growth.
The continuing trade conflicts are causing supply chain disruptions further adding to business costs. Companies spent considerable amount of time and cost over the last two decades or so in building up these supply chains but they are now facing great uncertainty leading to withholding further investment. As the trade disputes are unravelling, it now appears that there is a growing trend towards regionalisation of trade with a great emphasis on local production behind tariff walls rendering the multilateral system of trade untenable. In fact, a country like the US, the dominant economy in the world, is increasingly implementing policies outside the established rules governing international trade as if those rules are no longer desirable instead of putting something better to replace them.
At the same time there is the great concern that as the global economy is slowing down, the growing debt overhang will increasingly become a more serious problem for many countries. The easy money amounting to trillions of dollars made available to banks and other financial institutions in the wake of the GFC found their way into accumulating further debt for speculative investment rather than in the real economy. It is alleged that the credit rating agencies like before the 2007-08 GFC again going soft on heavily indebted corporations (except banks) who now owe US$10 trillion creating an environment for the repeat of the 2007-08 GFC.
In countries where dollar-denominated debt is prevalent as is in most emerging economies, any interest rates rise in the US will cause debt servicing more expensive leading to serious financial crisis as is happening now in Argentina and Turkey. According to The Economist emerging market companies' dollar-denominated debts have grown from 14 per cent to 20 per cent of GDP since 2009, on average.
Meanwhile, central banks in advanced economies including the ECB (European Central Bank) seem to be glued to pursuing the purchase of government bonds to drive down interest rates. In Japan, the public debt which is funded by Bank of Japan now accounts for 240 per cent of GDP (gross domestic product). In effect now in most advanced economies public expenditure is partly funded by the central bank rather than fully by tax revenue causing the public debt/GDP ratio to rise. During the semi-annual meeting of the IMF held in the middle of this month, Mervyn King, the former Governor of the Bank of England who presided over the bank during the 2007-08 GFC, warned that given the global economy was in a low growth trap, further continuation of the current monetary policy of easy money would be devastating for the legitimacy of the democratic market system. Indeed, he further added that pursuance of such policy would be tantamount to sleepwalking into another financial crisis.
Muhammad Mahmood is an independent
economic and political analyst.
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