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Governments, institutions struggle to find battle plan for next recession

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The International Monetary Fund (IMF) and other institutions are grappling with potential strategies to counter any severe economic downturn.

London

THE International Monetary Fund (IMF) and other institutions are grappling with potential strategies to counter any severe economic downturn.

Ahead of this week's IMF meetings in Bali, the institution's second chapter in its annual report discusses its current and possible policies.

The question is whether they will be adequate if predictions of another global recession by various economists eventually come true.

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Normally, central banks slash interest rates and governments cut taxes and raise infrastructure spending to spur economies. But despite recent rate rises, interest rates are still near rock bottom levels.

Moreover, many countries are hamstrung by massive government and private sector debt. This leaves little room to boost investment in factories, plant and equipment and raise employment. Robots are also taking jobs from unskilled workers.

The IMF itself and the vast majority of forecasters have downgraded their growth forecasts but the dreaded "R" word does not figure in their 2019-2020 crystal gazing.

The IMF's 3.7 per cent prediction of global economic expansion is higher than many other forecasts.

For instance, the Institute Of International Finance (IIF) expects global growth to drop to 3.1 per cent in 2019 due to emerging market problems and US President Donald Trump's protectionist trade actions.

Others maintain that it will slide below 3 per cent because of the high oil price and asset price deflation.

Since the Great Recession of 2008-2009, there have been several bleak forecasts, but brief downturns have been followed by relatively swift recoveries, mainly in bond, equity and property markets.

The main reason is that central banks led by the US Federal Reserve Board, European Central Bank (ECB) and Bank of Japan pumped money into the financial sector via quantitative easing (QE) - that is, the purchases of bank and other institutions' securities.

More recently, Mr Trump's tax cuts also spurred confidence, with the US economy's latest growth rate estimated at 4.1 per cent while unemployment has also fallen.

Despite the recent growth spurt, the US recovery since the Great Recession has been the slowest since World War II, say business cycle economists.

The revival in Europe and Japan has also been slack, while emerging markets such as Turkey and Argentina are already experiencing recession. Unemployment, especially among young people, is still disturbingly high and income inequality has widened.

A National Association for Business Economics' poll issued on Oct 1 showed that 10 per cent of 51 forecasters see the next US recession starting in 2019, 56 per cent say 2020 and 33 per cent 2021 or later.

Two-fifths said that the biggest downside risk was trade policy, followed by 18 per cent of respondents citing higher interest rates and the same proportion saying it would be a substantial stock-market decline or volatility.

Harvard professor Martin Feldstein, former US president Ronald Reagan's chairman of economic advisers, contends that "the principal risk now is that a stock-market slowdown could shrink consumer spending enough to push the economy into recession".

"As short- and long-term interest rates normalise, equity prices are also likely to return to historic price-to-earnings ratios. If the price-earnings ratio of the S&P 500 regresses to its historical average, 40 per cent below today's level, US$10 trillion of household wealth would be wiped out," he wrote in the Wall Street Journal.

Prof Feldstein fears that the Fed will not have enough room to cut rates, as the Fed-funds rate is expected to rise to only 3 per cent by 2020. There also won't be much room for a major fiscal intervention, he says.

Federal deficits are expected to exceed US$1 trillion annually in the coming years, and publicly held federal debt is predicted to rise from 75 per cent of GDP to nearly 100 per cent by the decade's end.

Economies would then have to rely on the natural business cycle of regeneration and stock replenishing to bring about a recovery.

READ MORE: IMF cuts forecast for global growth as trade war, stresses in emerging markets take their toll