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Hold on tight, it's a bumpy road ahead

History has shown that the indomitable spirit of man, more than monetary or fiscal policies, has been and always will be the most powerful weapon in fighting a recession.

The consolation is that we have been through worse. A major economic fallout like that of 2008, while probable, looks highly unlikely.

THE day we have feared has come. That is, a global economic recession looms as a distinct possibility. You've seen it all in the news - the slowdown of growth in the world's biggest economies, jittery markets and deteriorating business sentiments dominate the headlines.

In my view, while we are unlikely to see a repeat of the 2008 global financial crisis this time round, the road ahead is expected to be bumpy.

The truth is that this potential downturn - if it materialises - may originally have just been a conventional correction in the economic cycle. It has been made worse, however, by the ongoing US-China trade war. A decade of loose monetary policy, following the last financial crisis, has also left global central banks with limited monetary ammunition to fight any potential economic downturn.

Allow me to spell out the things that got us into the current situation today, and to point to some of the possible solutions that I find sensible enough - and which may make a bumpy ride just a little less nauseating.

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We have got a bit of a hangover situation in a post-2008 world. I liken the global economy then to a patient recovering from a bout of serious illness. To stem further deterioration in the patient's condition, multiple monetary easing programmes - for example, the record-low US interest rate of 0.25 per cent - were applied as "medication".

Five years later in 2013, we thought the patient would have been ready to be weaned off his prescription; what ensued instead were taper tantrums. Today, we see the patient seemingly back on his feet, but reaching out for painkillers at the slightest hint of discomfort.

To put it another way, we papered over the cracks of the 2008 crisis with cheap credit. And while you can give cheap credit, at some point you have to stop and re-adjust because resources are ultimately finite. This adjustment never happened.

The strains of the 2008 crisis and the resulting cheap credit policy can still be felt today. Globally, the income gap has widened. The rich who have access to capital were able to participate in the subsequent rally in asset prices; the middle class, however, started to shrink as it contended with low wage growth and layoffs. The US labour force participation rate, for example, never recovered to its pre-crisis levels.

This growing income inequality has started to lead to more extreme, previously unthinkable, political policies. As the appeal of globalisation wanes, we are witnessing more protectionist policies around the world - Brexit in the United Kingdom; the rise of far-right political groups in Europe; and most notably, the US waging a trade war on China.


What makes this potential downturn particularly tricky is the depleted monetary arsenal from central banks around the world.

In the US, for example, the Fed has always worked with the ability to slash at least 500 basis points or more in the event of a severe downturn. The Fed fund rate is currently at 2.25 per cent after one rate cut in July - effectively, the Fed's firepower is halved going into this downturn, and it is uncertain if they have enough to tide them over in this potential storm.

The worst-case scenario is the US falling into a liquidity trap - meaning, its interest rates are reduced to zero, and further stimulation from the central bank does not improve aggregate demand.

This may put America in the same boat as the other "Big Two" in the global economy - Japan and the eurozone.

Japan has largely led the way in demonstrating how sticky a liquidity trap can be. Headline inflation has rarely exceeded one per cent although interest rates were largely at zero for the better part of this millennium.

The same may be said about the eurozone, where zero interest rates have failed to spark any meaningful growth recovery since 2016.

The US economy now looks increasingly close in following Japan and the eurozone into a messy liquidity trap. The only bright spark is that the US has not displayed the same kind of economic malaise that both Japan and the eurozone have suffered pre-monetary easing.

The real fear is that if the world's three largest economies are stuck in a liquidity trap at the same time, the global economy may be set for a prolonged period of growth stagnation. This may extend deep into the next decade, as Japan can attest from experience.


The consolation is that we have been through worse. A major economic fallout like that of 2008, while probable, looks highly unlikely. The drivers of recessions in the past - overheating due to high inflation and unsustainable asset bubbles - have barely shown up in today's macro environment.

If lower interest rates are unable to do the job, governments around the world will have to chip in with fiscal stimulus to stem the potential rot. This is an endorsement of Keynesian economics, which suggests that governments should be allowed to run larger fiscal deficits during economic downturns. This pumps more demand into a flagging economy and nips the vicious downward spiral of softening consumption.

Globally, we are already seeing governments attempting to jumpstart their economies via fiscal tools. Thailand, for example, has recently unveiled a 316 billion baht (S$14.3 billion) fiscal stimulus programme.

As for businesses, this economic downturn provides a timely reminder that the economic tide waits for no man. Cheap credit can only sustain an inefficient business to an extent. Continuous investment in human capital, innovation and knowledge to keep pace with the shifting economic landscape will remain key elements in bracing future headwinds.

What we may have to face, in the meantime, is what we as human beings hate the most - uncertainty and discomfort. But take note that while the tidings are not the rosiest, the likely scenarios - at present, at least - are not quite the doomsday that everyone fears.

Meanwhile, keep calm and carry on. Even though winter may be coming, spring will always follow after. History has shown that the indomitable spirit of man, more than monetary or fiscal policies, has been and always will be the most powerful weapon in fighting a recession.

The writer is an economist at OCBC Bank