Global economy on threshold of slowdown

Wednesday, 2018-10-10 17:49:16
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IMF managing director Christine Lagarde speaks during her opening remarks at the 2018 General IMF Meetings in Washington on Monday. (Photo: Getty)
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NDO – The Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group (WB) have just opened in Bali, Indonesia. Ahead of the conference, the two aforementioned financial institutions and many economic experts warned of the risks of global economic uncertainties, while some held the belief that the world economy is on the threshold of recession if drastic actions are not taken by governments.

The 2018 IMF-WB Annual Meetings take place amid growing uncertainty in the global economy. Rising public debts, especially in emerging markets, and the United State-China trade war getting “hotter and hotter” and spreading to other areas, are the factors hindering the growth momentum of the world economy. Prior to the Bali meetings, IMF Managing Director Christine Lagarde warned that trade disputes and tariffs are beginning to make the prospect for global economic growth gloomy. Accordingly, the IMF chief urged countries to resolve their differences and reform the rules of global trade.

More pessimistic views of the world economic outlook were also made by numerous prestigious experts ahead of the IMF-WB meetings. Japan’s Kyodo News quoted billionaire Raymond Dalio, the founder of Bridgewater Associates – one of the world’s largest hedge funds – as saying that the world economy is “on the threshold of an era of slowdown”, after having overcome the economic crisis ten years ago, and it is likely that the new recession will take place in the next two to three years. According to Dalio, a major problem now is that the debts of economies are increasing at an alarming level. The central banks are mostly focused on inflation, while some focus on both inflation and growth, but don’t pay adequate attention to debt growth.

What’s worrying is that the central banks’ monetary policy loosening measures are pushing up asset prices, while low interest rates are causing policymakers to have little choice in terms of monetary policies to boost the economy, if the next slowdown occurs. Many economists shared the standpoint that policymakers will not have a “prescription” to treat the economy, if the financial crisis “disease” reoccurs.

Meanwhile, the United Nations Conference on Trade and Development (UNCTAD) has warned that the world economy is “beginning to show signs of shakiness because of financial uncertainty and trade wars. Besides the risk of financial risks, trade wars are overshadowing the global economic outlook. The UNCTAD has warned that the escalating trade tensions between the US and China are a sign of deterioration in the economic system and multilateralism. In fact, the “poisonous breeze” from the risk of a financial crisis and trade wars has been causing major economies to “get cold”. According to recent IMF reports, the economies of Republic of Korea, Japan, and the Eurozone are being faced by difficulties and have recorded negative signals in economic growth. The survey results, recently published by global information provider, IHS Markit, showed that the Eurozone economy lost its momentum in September and the decline in its Purchasing Managers’ Index (PMI) is predicted to continue in the fourth quarter of 2018.

Ahead of the conference in Indonesia, the IMF forecast that Japan’s economy would reach 1.1% in 2018 and fall by 0.9% next year. Meanwhile, the WB recently released a report highlighting a worrying situation caused by the devaluation of domestic currencies in most of the major emerging markets in Latin America. Net capital inflows into this region fell from a peak of US$49.6 billion in January to US$18.8 billion in August. The risk of financial uncertainty has also increased, as public debt exceeded 60% of the gross domestic product (GDP) in the Latin American region as a whole, with six countries posting a public debt to GDP ratio of over 80%.

In July, the IMF forecast that global economic growth in 2018 and 2019 would reach 3.9%, but this outlook has become less bright and the IMF chief recently said the financial institution would issue new forecasts on the world economy in the next few days. Many economists stated that the IMF is likely to lower its global economic growth forecasts and outline the “world economic picture” with more gray shades compared to the July report.

The warnings of the world economy being on the “threshold” of a new recession will certainly be issued by the IMF, the WB and economic experts in the coming days. All of the aforementioned warnings have been sent to the governments of countries, transmitting an important message of an urgent need to take immediate action to control the financial uncertainty risks and effectively resolve the existing trade frictions.