All roads lead to China, where a mighty economic slowdown is pricking hugely inflated bubbles
When the financial crisis hit in 2007, commentators agreed that it was the worst since the legendary Great Depression. Bold unprecedented steps were taken. Big banks were promptly rescued with taxpayer money. Central banks embarked on ambitious interventionist programmes. According to the narrative, things were supposed to get better.
Seven years later, where exactly do we stand? Several critical statistics indicate that the global economy is now, in many ways, perhaps worse off than it was during the crash. Let’s consider a worst-case scenario:
Growth is dismal. “It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should,” said WTO chief economist Robert Koopman in September. Forecasts are being revised downwards all over the place. Last year in October, the IMF predicted global economic growth of 3.8 per cent for 2015, revised it down to 3.5 per cent this April and 3.3 per cent in July. The OECD predicts 3.1 per cent. This figure is lower than the average of the last two decades.
According to the ILO, global unemployment will continue to increase till the end of the decade, rising from 201 million to more than 212 million people out of work. A key factor is sharply accelerating inequality. As per Oxfam, by next year the top one per cent are expected to own more wealth than the rest of the world’s population combined. It may take generations to normalise this trend, if at all.
Zooming in from our global view to current hotspots, Puerto Rico defaulted on its debts a few months ago. Moody’s rating agency ranks 11 other countries as default risks, including Greece, Ukraine, Argentina and Venezuela. This quarter, Brazil and Canada tumbled headlong into recession. Japan is hovering on the brink, its second recession in two years.
In the United States, some key indicators are tanking: the labour force participation, a metric which tracks long-term unemployment, is at a record 38-year high with some 94 million Americans simply unable to find work. The home ownership rate i.e., the percentage of Americans actually owning their own homes, is at a record 48-year low, a few tenths of a percentage from an all-time low. Before the crisis of 2008, approximately 18 per cent of American children lived in poverty. Now it’s 22 per cent. Homelessness is soaring in several cities along with dramatic double-digit increases in violent crime.
Over in Europe, last year, a gathering of Nobel economists passed a particularly harsh verdict on the EU’s economic policies. Joseph Stiglitz warned of a “depression lasting years, leaving even Japan’s Lost Decade in the shade”. In the UK, aggressive austerity policies have yet to yield tangible benefit, the debt-to-GDP ratio has skyrocketed and home ownership rates are at a 25-year low. In March, the banking division of the Financial Times described the UK economy as “a ticking time bomb”. Homelessness has gone up by 12 per cent over the last year.
France is wrestling high joblessness. Moody’s just downgraded its credit rating, predicting “weak” growth ahead. The Greek problem is far from solved, merely postponed, and the rest of the PIGS, Italy, Spain and Portugal are still in economic limbo. Germany actually performed very well, successfully balancing its budget for the first time in 40 years. It’s too early to party though: Germany is an export-based economy and is very vulnerable to falling demand for its goods in key emerging markets like China. In August, orders for German exports fell 5.2 per cent, the sharpest monthly decline since the crisis.
All roads lead to China, where a mighty economic slowdown is pricking hugely inflated bubbles. No one knows if the stock market meltdown is fully contained. In its desperation to cap the damage, the government has tossed free market principles out the window, imposing a six-month ban on major stock sales and zealously harassing journalists for “spreading rumours”. Currently, there is an eerie calm, much like the lull before a storm. Pessimism over China has diverted considerable investor attention to India. But rapidly growing India also registered a slowdown in growth last quarter.
Resource-based economies, like Brazil and Australia, which rely on China’s manufacturing engine to drive them, are haemorrhaging and the IMF predicts they are in for a world of trouble ahead. The IMF has also cautioned emerging Asian economies of negative ripples from China.
So while we can argue about how bad this situation really is, we can agree that things are most definitely not good. And now a growing number of mainstream voices are saying that the next recession may be right around the corner.
The Telegraph kicked off the trend in August, publishing a terse, vivid doomsday scenario of global stock markets heading for an imminent crash. China was at the heart of it.
In September, a think tank associated with Daiwa Securities Group, Japan’s second-largest investment bank, published an economic outlook report, sounding an ominous note: “Of all the possible risk scenarios, the meltdown scenario is, realistically speaking, the most likely to occur … If China’s economy, the second-largest in the world, twice the size of Japan’s, were to lapse into a meltdown situation such as this one, the effect would more than likely send the world economy into a tailspin. Its impact could be the worst the world has ever seen.”
Two days later, Citigroup seconded the verdict: “A global recession starting in 2016, led by China is now our Global Economics team’s main scenario. Uncertainty remains, but the likelihood of a timely and effective policy response seems to be diminishing.” Citigroup’s chief economist, Willem Buiter, termed the current economic climate as “classic recession scenario”. Business Insider went one step further, running the headline, “A new global recession has begun”.
In October, the IMF’s Global Financial Stability Report sounded a similar refrain: “Shocks may originate in advanced or emerging markets and, combined with unaddressed system vulnerabilities, could lead to a global asset market disruption and a sudden drying up of market liquidity in many asset classes.”
Andy Haldane, chief economist of the Bank of England, visualises this ‘emerging market’ crisis as the final scene of a “three-part crisis trilogy”, that started with the “‘Anglo-Saxon’ crisis of 2008-09” and led into the “the ‘euro-area’ crisis of 2011-12”.
Another very stressful factor is the rhythm of economic cycles. Prior to 2008, the US economy encountered a recession in 2001. Before that there was the 1994 meltdown in Treasury bonds. In 1987, international stock markets crashed, also drawing comparisons to the Great Depression. Major economic calamity seems to strike on average every seven years somewhere in the world in a pattern going all the way back to the Second World War. Economist Bill Conerly, writing for Forbes, expressed this sentiment late last year: “I know it’s coming, but I’m not sure when. We will have a recession within the next few years, which is an easy forecast.”
All isn’t gloom and doom though. Economic predictions are not prophecy, they are constantly revised, and several upbeat forecasts are circulating in the media as well. There is considerable value in exploring worst-case scenarios, however. Over the last decade, decidedly pessimistic forecasters have had a strong track record. Plus it’s sensible policy: we must hope for the best, of course — but as the wise man would say — prepare for the worst.
Published in The Express Tribune, October 16th, 2015.
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