The International Monetary Fund (IMF) and other institutions are grappling with strategies to counter a severe economic downturn.
Ahead of the coming IMF meetings, the institution’s second chapter in its annual report discusses current and possible policies. The question is whether they will be adequate if recession predictions of some eminent economists come true.
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, nations 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.
“R” Word Hardly Mentioned in Official Forecasts
The IMF and the vast majority of forecasters have downgraded their growth forecasts, but the R word does not figure in their 2019 to 2020 crystal gazing. The IMF’s 3.7 per cent prediction of global expansion is higher than many economic teams. As an example, the Institute Of International Finance (IIF) expects global growth to drop to 3.1 per cent next year due to emerging market problems and President Trump’s trade protectionism. 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 to 2009, there have been several doom forecasts. Instead, 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) – i.e. the purchases of securities from banks and other institutions.
More recently, President Trump’s tax cuts also spurred confidence and helped raise the US economy’s latest growth rate to 4.1 per cent. Unemployment has also fallen sharply, although the numbers of part-time and low paid workers are higher. Despite the recent growth spurt, the US recovery since the Great Recession has been the slowest since World War 11, 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 amongst young people is still disturbingly high and income inequality has widened.
More than half business economists predict recession from 2020
A National Association for Business Economics’ poll issued on October 1, shows 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, Almost a fifth of respondents cited higher interest rates and the same proportion feared a substantial stock-market decline or volatility.
Martin Feldstein fears asset price deflation
Harvard professor Martin Feldstein, who was chairman of President Reagan’s economic advisors, contends “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 normalize, equity prices are also likely to return to historic price-to-earnings ratios.”
“If the P/E ratio of the S&P 500 regresses to its historical average, 40 per cent below today’s level, $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, stock replenishing to bring about a recovery. But that could take time.
© Copyright Neil Behrmann
This article was first published in The Business Times, Singapore. Neil is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining, smuggling and nefarious Russian oligarchs, has recently been published. It is the sequel to the financial thriller, Trader Jack, The Story of Jack Miner. See reviews of both books via: https://www.amazon.co.uk/Neil-Behrmann/e/B005HA9E3M