Synchronised global slowdown as indicated in the World Economic Outlook published by the International Monetary Fund (IMF) in October last year, now appears to be even getting worse. At the same time there has been a broad-based slowdown in productivity growth impacting on output growth. A commentator told the Wall Street Journal that the market did not really believe the global growth story anymore, it only believed in the central bank prop-ups.
In a report published by the UN trade and development body, UNCTAD reported that 2019 endured the weakest economic expansion in a decade and there was a risk of that slowdown turning into outright contraction in 2020. Weaker growth both in advanced and developing countries now has created the possibility of a global recession in 2020. The report further warned that policy makers should put their increased attention to dealing with fallouts from trade wars and Brexit, currency gyrations and movements in long-term interest rates.
Unconventional monetary policy measures such as negative interest rates and creating money through quantitative easing (QE) have not yielded the desired results to stimulate consumption or investment. The global economy still remains fragile despite it is now more than a decade that the GFC (global financial crisis ended.
The report further added the slowdown in growth in all major economies including the US clearly indicates the reliance on easy monetary policy and asset prices to stimulate demand, at best, produces ephemeral growth. Also, corporate and income tax cuts so far failed to trigger any investment in the real economy.
Amid a global slowdown in economic growth, central banks have lowered interest rates near zero or below in an attempt to provide stimulus but in rich advanced economies like the Eurozone, the US and Japan people are hoarding cash instead of spending. Yet, the US Federal Reserve (Fed) kept its interest rate on hold after three cuts of 0.25 percentage points since the middle of the last year.
Now the newly added coronavirus effect is causing serious concerns how the virus will play out affecting the global economy as global financial markets have already experienced sharp falls in Asia, Europe and the US. Also, stock markets in China have seen the biggest fall for five years as traders rush to sell amid continued fears on the impact of coronavirus on the global economy.
Something rather very new may be emerging - a global economic slowdown triggered by China not the US. China now accounts for about one-third of global growth, a larger share than the US, the EU and Japan combined. Any slowdown in the Chinese economy could be felt widely across the world.
TRUMP'S CLAIM VERSUS DATA: President Donald Trump in his State of the Union address touted that the US economy as "as the best it has ever been'', but data does not support that assertion. The US, the largest economy in the world accounting for 24 per cent of the global economy recorded 2.3 per cent growth in 2019 and expected to grow by 1.9 per cent this year, well below the Trump administration's goal of 3.0 per cent. Along with a decline in the GDP (gross domestic product) growth rate this year, consumption and real fixed investment are also likely to decline with expected growth rates at 1.8 per cent and 2.5 per cent respectively.
The much anticipated "muted inflation'' resulting from a fall in the official level of unemployment to 3.5 per cent, now appears to be dissipated into the thin air. The reason is the rise in employment numbers has been largely due to jobs created are at low wage rates. According to the Brooking Institute 44 per cent of US workers are on low wages. The growth strategy ideally should be based onincome growth higher than asset price inflation. This is the sure recipe which will ensure economic security over the longer term.
To further complicate the situation, Trump's tariffs negatively impacted on manufacturing and agriculture. In fact, US manufacturing was in mild recession in 2019 and output declined by 1.3 per cent in 2019. Net farm income in the US fell by nearly half in the last five years from US$123 billion to US$63 billion. The agriculture sector is now beset with rising debt and falling commodity prices. Trump's tax cuts and increased spending added substantially to the national debt where the US government budget deficit reached nearly US$ 1.0 trillion in 2019.
The former chair of the US Federal Reserve, Janet Yelled in late November last year opined that she did not foresee a recession in the coming year but then added "the odds of a recession are higher than normal and at a level that I am not comfortable with". In fact, according to Bloomberg the US will inevitably fall into a recession - with current odds for a downturn in 2020 at 27 per cent.
CHINA CONCERN: But it is China, the second biggest global economy, accounting for 16 per cent of global GDP is increasingly becoming a concern. Based on the latest data coming out of China published by the National Bureau of Statistics (NBS), Bloomberg opined that the "engines of China's economy are spluttering with exports falling, factory output slowing. Investment at a record low and consumption coming off the boil''. According to the NBS, fixed investment, retail sales and manufacturing output, all are showing a declining trend in their growth rates.
Now the key concern is the impact of the spread coronavirus will have on the Chinese growth rate. More than a dozen provinces announced an extension of the lunar new year holiday by a week in response to the virus. This will have a significant impact on GDP growth. Bloomberg economists warned that the growth rate might drop to 5.6 per cent for the year if the virus is not contained by the second quarter. Goldman Sachs has forecast that the virus could knock Chinese growth down to 5.5 per cent for the year from 6.1 per cent in 2019 with knock-on effect for the rest of the world economy.
Japan, the world's third largest economy has slowed sharply and is expected to grow by 0.6 per cent this year compared to 1.0 per cent in 2019. The Japanese economy has been hard hit by the US-China trade war. Germany, the world's fourth largest economy and the driving force of the Eurozone economy, narrowly escaped a technical recession in 2019 but all data on the German economy clearly indicate the economy is stalling.
The slowdown in growth in all the major developed economies including the US will lead to sharp decline in the flows of global trade as a result a slump in global demand notwithstanding a tenuous pause in the US-China trade conflict which has damaged both economies. In a global economy of high interdependence, there are serious economic implications for developing economies including Bangladesh arising from global economic slowdown.
BANGLADESH SCENARIO: A global economic downturn will have varied but wide repercussions across the Bangladesh economy. A global recession will be in the main transmitted to the Bangladesh economy through declining trade volume, investment and remittances. While Bangladesh does not have a highly globally exposed financial sector, yet all those transmission mechanism will have an impact on the balance sheet of banks.
The transmission of the crisis will hit harder manufacturing exports, that means ready-made garment (RMG) exports which have already been facing a strong headwind as reflected in declining export earnings over the last few quarters as well as job losses in the industry.Wage growth has been stagnant (described as income recession) in the two principal export markets for RMG - the US and the Eurozone for a considerable period of time. In the event of a recession hitting these two markets, not only unemployment will rise, but also real wages will decline, negatively impacting on RMG imports from Bangladesh. The impact of falling exports will translate into job losses and much lower growth rate for Bangladesh. Urban households will suffer more losses than rural households because manufacturing activities are concentrated in urban areas. This will cause an increase in the level and depth of urban poverty.
Remittances have become massively important for Bangladesh constituting the single largest source of foreign exchange earnings. Most Bangladeshi workers are employed in the oil producing Middle-Eastern countries. Already oil prices have fallen by 20 per cent over concerns that the coronavirus epidemic will dampen China's demand for oil. China is the world's top oil importer and uses 10 million barrels a day on average, but now estimates place China's demand for oil at 2.5 million barrels a day, or only about 20 per cent of last year's high because of the lockdown in several provinces disrupting industrial production and supply chains.
With recession hitting major industrialised advanced economies, will only cause further downward spiral of oil prices. This will cause sizeable job losses for Bangladeshi workers. Arising from the current global economic slowdown and further aggravated by the coronavirus epidemic likely to cause the US dollar to appreciate. In such an event, those Bangladeshis who will remain employment could find their dollar equivalent income in the local currency to decline. This will result in a fall in remittances. A decline in remittances will largely hit hard rural households causing a decline in household consumption, even leading to asset rundown to meet the costs of daily necessities making these households both income and asset poorer.
A global recession will also see the collapse of foreign direct investment (FDI) globally. This may prove to be potentially more damaging for Bangladesh since FDI is already very low and will hinder the country's efforts to diversify its manufacturing base and exports. A slowdown in economic activity resulting from trade, investment and remittances has the potential to turn an economic crisis into a social crisis also.
Muhammad Mahmood is an independent
economic and political analyst.