Brace for a global recession unlike any other amid a world polarised by the US and China
The 2019 recession will be different, in a heavily leveraged global economy with already slowing trade – where normal policy tools may no longer work.
Post-recession, Asian nations in particular should expect to have to take sides as the US and China vie for ownership of the new global economic narrative
Anthony Rowley Published: 11:00pm, 9 Jun, 2019
Global economic recession is no longer a threat but an inevitability. The question economists should be asking is not whether or when a recession will strike but rather what can be done once it does. Normal policy tools such as monetary easing and/or fiscal stimulus may be no more effective than pushing on the proverbial piece of string.
This time, it will be different — as optimists like to say when trying to convince themselves that crises cannot happen again; though not for the reasons they think. The 2019 recession will be different from the Great Recession
a decade ago, and indeed, from any slump since the Great Depression of the 1930s.
The comparison with 1930
— when the US introduced its Smoot-Hawley tariffs and plunged the world into depression in the wake of the 1929 US stock market crash — is obvious, except, this time, world trade growth is already crumbling. Global trade growth is at its slowest in 10 years, according to the World Bank.
Trade crises tend to cut deeper into the heart of global economic activity than any of the post-war financial or debt crises did. The onset may be slower and less dramatic but the adverse effects last longer.
It is easy to forget that what caused global economic growth to stagnate for seven or eight years after the 2008 financial crisis was the secondary shock to trade. World trade only began to pick up again in 2016, to then have US President Donald Trump clobber it with tariffs
.
The renewed slowdown in trade this time is more complex and systemic than the one that followed the Great Recession, and it is accompanied by a global economy still dependent on residual monetary stimulus from the 2008 crisis to keep investment and consumption moving forward, if uncertainly.
The World Bank expects global economic growth to ease
to a weaker-than-expected 2.6 per cent in 2019. Its president, David Malpass
, said: “There's been a tumble in business confidence, a deepening slowdown in global trade, and sluggish investment in emerging and developing economies.”
Yet, stock markets have chosen to focus on hopes that the US Federal Reserve and other central banks will conduct monetary easing again. This is clutching at straws. As former Deutsche Bundesbank president Axel Weber noted in Tokyo last week, markets have “overpriced” the chances of precautionary easing.
China has been easing off on easing.
China has been easing off on easing.
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China central bank says no need for easing after tariff hike
Another legacy of the 2008 crisis is the mountain of debt
in advanced and developing economies, a consequence of easing and historically low interest rates. As Malpass said, “Debt management and transparency need to be high priorities”.
In this situation of slowing economic momentum, declining business confidence and investment, and a general sense of economic malaise, who can doubt that the slowdown risks spilling over into a recession?
The world following a 2019 recession is likely to be more polarised
or even bifurcated, where the US and China, as the two biggest growth poles, seek to write their separate economic narratives.
They will be more mutually distrustful, and the nations that depend on them are likely to need to adapt their economic structures — including supply chains
for manufacturing and service sector activities — to new and more restricted areas of operation.
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Technological interchange and advancement is likely to slow. And the already growing tendencies towards nationalism and populism could prove a significant and persisting setback to globalisation.
The effects are likely to play out most obviously in Asia, where nations have so far been steering a successful, if fine, line between the two major economic powers. They are increasingly likely to have to take sides in trade wars that cannot be won.
US-China trade war will make or break Asean
Perhaps the most they can hope for is to survive a new cold war and avoid a “hot” war. Even if a stock market collapse (in the US or China) or a renewed debt crisis forces a truce between the US and China, a rapid return of business confidence, investment and consumption is unlikely.
Both Trump and Chinese President Xi Jinping are strong-minded leaders and they represent a clash of cultures and systems that, perhaps, was due for confrontation. There is still room for compromise and mutual coexistence, even if not a marriage of minds. But the room for manoeuvre is getting worryingly small.
