The global economy is not in crisis but is still vulnerable


NEW YORK (Reuters) – Fear of an impending recession, which has generated major turmoil in financial markets in late 2018 and early 2019, has calmed down a bit.

That's the good news. The bad news is all that revealed this episode of fear.

For much of 2018, the world economy seemed finally to emerge from the swamp where it stagnated for a decade after the great recession and the global financial crisis. However, the era of persistent low growth, low inflation and low interest rates has not ended.

The European Central Bank (ECB) said on Jan. 24 that the "short-term growth rate is likely to be weaker than expected" and that the Bank of Japan has decided to maintain its stimulus policies against potential risks to its growth. In the United States, the Federal Reserve will hold a meeting in the coming days, after which it is likely that it will decide to keep the interest rate unchanged.

So while the world economy has given some promising signs of vitality for much of last year, the problems that plagued it for a decade are still there; among them, the aging of the workforce in many of the most important economies, very low productivity growth and overcapacity in the industrial and global economy, and a lack of demand around the world.

These factors predict a dangerous time: because growth rates are low, it is easier for economies to go into recession, and because interest rates are low, central banks would have less robust tools at their disposal to reduce them. the consequences of a downturn.

"This shows that the forces that have constrained many economies are far more difficult to combat and more widespread than many expected or believed," said Roberto Perli, a partner at Cornerstone Macro. "It's bad news for the pay prospects of workers in many countries and for those who expect a reversal of the growing trend of inequality that lasted several years."

Because growth rates are low, it is easier for economies to go into recession.

Bear in mind that markets collapsed during the last weeks of 2018 largely due to fears that the US Federal Reserve would raise interest rates in a larger proportion than the economy could bear (for example, if the rate higher, people tend to consume less and are less likely to manage credit).

What tells us that an interest rate of only 2.4%, the level at which the US rate stayed after the December increase, is enough to bring the economy to the brink of collapse?

Now that the world economy relies heavily on stimuli to achieve small growth, there is little room for maneuver to cushion a negative reaction to change. In the case of the United States, for example, there is greater vulnerability to recession due to a number of factors, such as the closure of public administration – which ended Jan. 25 and lasted more than a month – or the prospect of a trade war like the one that has been fermenting with China.

Adam Posen, president of the Peterson Institute for International Economics, said that "if growth and investment look like this when there is relatively loose fiscal and monetary policy, especially in the United States, that means there is no solidity in the background."

"The situation can be much worse if the policy becomes more restrictive without there being any need for it," he added. "In any case, it is worrying to think about what the world economy would look like if there were no macroeconomic support" to stimulate low interest rates and deficits.

There is a risk of generating a negative feedback loop: the low growth of the last decade, which has caused stagnation in income, may have contributed to political problems in nations such as the United Kingdom, Italy, and the United States. These problems, in turn, may create new risks of a disruptive event in the economy, as happened in Washington with the recent closure of management.

The world economy is not in crisis; that there is slight growth is better than no growth or contraction.

However, the clear lesson of recent months is that the forces that maintained the global economy for eleven years were not temporary: they did not disappear. As a result, the world is in a particularly vulnerable position to face a series of bad luck or bad politics.

Therefore, the low global growth was not just a phase; It is the new reality that we must take on before each debate and macroeconomic issue in the near future.


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