Caution: global economic headwinds ahead

Fee-fau-fo-fum, little children here I come. Global economic slowdown has started to rumble. Whether it will grow into a giant, i.e. an unprecedented global recession as some expect, is still to be seen. But an increasing number of leading economic observers of late have been warning of difficult times ahead.

Early indicators of a global slowdown are already in. Global manufacturing output fell last month for the fifth straight month. In fact, Wall Street Journal reports that it has been slowing since early 2018. This coincides with downticks in Alan Greenspan’s favourite indicator which he discussed in his memoir ‘The Age of Turbulence’: steel. International steel prices have been falling since 2018 due to demand-related concerns, and if steel forward contract prices are any guide the future doesn’t look promising either.

Some of the feared reasons behind the expected slowdown have already been talked about. This includes trade wars and tariff walls, and a hard Brexit that can also trigger a global recession. For instance, citing trade war fears as well as other indicators such as the latest reading of Institute of Supply Management's manufacturing index which fell to its lowest metric since 2009, Bloomberg’s top ranked forecaster Christophe Barraud recently said he sees a 'prolonged global slowdown' on the horizon. But it’s not only the slowdown that is worrisome; it’s the expectations that this crisis would be worse than 2008’s.

Larry Summers, Harvard professor who previously served under two US administrations, recently warned of a blackhole kind of situation from which it will be difficult to get out. He was reported saying: “The experience in Japan, Europe, or even the U.S., is that once you get into a near-zero interest-rate regime, it’s kind of a black hole. The economy tends to be pulled in, and once there, it’s difficult to escape. Japan is unable to, and it doesn’t look like Europe will. The U.S. did escape, but it looks like we’re being pulled back in. We’re only one recession away from ‘Japanification.’ In the black hole, weak economic growth and low inflation lead to low interest rates, and falling confidence makes it hard to escape low rates.”

It appears that Summers was echoing the fears of the famous Dr Doom, Nouriel Roubini, of the 2008 crisis. Roubini warns that “unlike the 2008 global financial crisis, which was mostly a large negative aggregate demand shock, the next recession is likely to be caused by permanent negative supply shocks from the Sino-American trade and technology war. And trying to undo the damage through never-ending monetary and fiscal stimulus will not be an option.” The three shocks in question stem from:  trade and currency wars, a new cold war over technology (robotics, AI, 5G), and oil price shock should US becomes increasingly hostile with Iran.

And now, in latest news the IMF has joined in the ranks. In her first speech after taking office, IMF’s newly appointed chief Kristalina Georgieva said her team expects a synchronised global slowdown. The IMF expects 2019 to witness slower growth in nearly 90 percent of the world, its lowest rate since the beginning of the decade, whereas just two years ago countries representing nearly three-fourth of global output were seeing accelerating growth. In light of these evolving circumstances what should Pakistan do? That question will be addressed in this space tomorrow.