Anis Chowdhury and Jomo Kwame Sundaram :
In light of the uncertainty caused by the US-China trade war, the IMF expects the US economic growth to slow from a three-year high of 2.9 per cent in 2018 to 2.5 per cent in 2019, while China’s expansion has already slowed in recent years, albeit from much higher levels.
US President Trump and the previous GOP-controlled US Congress claimed to be breathing new life into the US economy with generous tax cuts. The US economy is now overheating, with inflation rising above target, causing the Federal Reserve to continue raising the federal funds rate to dampen demand.
As most families hardly gained from the tax changes, US purchases of houses and consumer durables continued to decline through 2018. Instead of investing in expanding productive capacity, US companies spent much of their tax savings on a $1.1 trillion stock buy-back spree in 2018.
Hence, the positive impacts of tax cuts were not only modest, but are also diminishing. Nearly half of 226 US chief financial officers recently surveyed believe that the US will go into recession by the end of 2019, with 82 per cent believing that it will have begun by the end of 2020. Wall Street’s biggest banks, JP Morgan and Bank of America, are also preparing for a slowdown in 2019.
As if to confirm their concerns, both the Dow Jones Industrial Average and the S&P 500 had their worst ever December performance since 1931, when stocks were battered after the Great Crash. Meanwhile, the European Central Bank is expecting sluggish 1.7 per cent regional growth in 2019. Europe is close to recession with the collapse of industrial output in Germany, France, UK and Italy.
Germany’s industrial output fell by 1.9 per cent month-on-month in November 2018, and was in negative territory in 5 of the 6 months before December. Its GDP fell by 0.2 per cent in the 3rd quarter of 2018. France’s industrial production fell 1.3 per cent in November 2018, reversing a 1.3 per cent growth recovery in October from a 1.7 per cent decline in September. Italy, Europe’s third largest economy, recorded negative growth in the 3rd quarter of 2018 as GDP fell by 0.1 per cent in July-September 2018 with weaker domestic demand. As the UK remains mired in its Brexit mess, GDP growth was dragged down to 0.3 per cent in the three months to November with the biggest industrial output contraction since 2012. 2018 final quarter growth is expected to be 0.1 per cent, i.e., negligible.
Not preparing for the inevitable?
David Lipton, the first deputy managing director of the IMF, warned in early January 2019, “The next recession is somewhere over the horizon, and we are less prepared to deal with that than we should be?.?.?. [and] less prepared than in the last [crisis in 2008].”
Although the IMF had projected 3.7 per cent global economic growth for 2019 in October 2018, Lipton’s statement suggests that the IMF is likely to revise its 2019 growth forecast downward. There have also been growing concerns over the continued efficacy of unconventional monetary policy since the 2008-2009 global financial crisis (GFC). Undoubtedly, countries now have less fiscal space than in 2009, and overall borrowing, including public debt has risen since. The policy blunders since the GFC have only made things much worse. The ideologically driven case for fiscal consolidation did not boost investor confidence for a robust recovery, as promised.
Despite acknowledging false claims cited to justify fiscal consolidation, including the IMF’s admission that its early advice was based on faulty calculations, there was no recommended change in policy course. Instead, all responsibility for recovery was put on the monetary authorities who resorted to unconventional policies, especially ‘quantitative easing’ (QE). However, the global economic recovery since then has remained tepid and easily reversible.
Additional liquidity, made available by QE, has largely been used to buy financial assets and for speculation, amplifying the financial vulnerability of emerging market economies, which have experienced increased volatility. Governments also failed to take advantage of historically low, even negative real interest rates to borrow and invest to boost productive capacity in the longer term. By mainly benefiting financial asset holders, QE has exacerbated wealth concentration. Meanwhile, cuts in public services and social spending have worsened social polarization, as tax cuts for the rich have failed to generate promised additional investments and jobs growth.
The failure to achieve a robust recovery has not only worsened the debt situation, but also made lives harder for ordinary people. Growing polarization has also worsened resentments, eroding trust, undermining solidarity and progressive alternatives. But lack of preparedness can hardly be due to ignorance as there have been many such predictions recently, certainly more than in 2007-2008, before the GFC. The cooperation that enabled co-ordinated actions to prevent the Great Recession from becoming a depression has not only waned, but major countries are now at loggerheads, preventing collective action.
National political environments are also more hostile. In Europe, the rise of ethno-populist nationalism is making it harder to pursue EU-level policies and to act together to prevent and mitigate the next financial crisis and downturn. The “new sovereigntists” and false prophets of American exceptionalism are undermining multilateral cooperation when needed most. Thus, a recession in 2019 may well elevate geo-political tensions, exacerbating the negative feedback loop for a ‘perfect storm’.
In light of the uncertainty caused by the US-China trade war, the IMF expects the US economic growth to slow from a three-year high of 2.9 per cent in 2018 to 2.5 per cent in 2019, while China’s expansion has already slowed in recent years, albeit from much higher levels.
US President Trump and the previous GOP-controlled US Congress claimed to be breathing new life into the US economy with generous tax cuts. The US economy is now overheating, with inflation rising above target, causing the Federal Reserve to continue raising the federal funds rate to dampen demand.
As most families hardly gained from the tax changes, US purchases of houses and consumer durables continued to decline through 2018. Instead of investing in expanding productive capacity, US companies spent much of their tax savings on a $1.1 trillion stock buy-back spree in 2018.
Hence, the positive impacts of tax cuts were not only modest, but are also diminishing. Nearly half of 226 US chief financial officers recently surveyed believe that the US will go into recession by the end of 2019, with 82 per cent believing that it will have begun by the end of 2020. Wall Street’s biggest banks, JP Morgan and Bank of America, are also preparing for a slowdown in 2019.
As if to confirm their concerns, both the Dow Jones Industrial Average and the S&P 500 had their worst ever December performance since 1931, when stocks were battered after the Great Crash. Meanwhile, the European Central Bank is expecting sluggish 1.7 per cent regional growth in 2019. Europe is close to recession with the collapse of industrial output in Germany, France, UK and Italy.
Germany’s industrial output fell by 1.9 per cent month-on-month in November 2018, and was in negative territory in 5 of the 6 months before December. Its GDP fell by 0.2 per cent in the 3rd quarter of 2018. France’s industrial production fell 1.3 per cent in November 2018, reversing a 1.3 per cent growth recovery in October from a 1.7 per cent decline in September. Italy, Europe’s third largest economy, recorded negative growth in the 3rd quarter of 2018 as GDP fell by 0.1 per cent in July-September 2018 with weaker domestic demand. As the UK remains mired in its Brexit mess, GDP growth was dragged down to 0.3 per cent in the three months to November with the biggest industrial output contraction since 2012. 2018 final quarter growth is expected to be 0.1 per cent, i.e., negligible.
Not preparing for the inevitable?
David Lipton, the first deputy managing director of the IMF, warned in early January 2019, “The next recession is somewhere over the horizon, and we are less prepared to deal with that than we should be?.?.?. [and] less prepared than in the last [crisis in 2008].”
Although the IMF had projected 3.7 per cent global economic growth for 2019 in October 2018, Lipton’s statement suggests that the IMF is likely to revise its 2019 growth forecast downward. There have also been growing concerns over the continued efficacy of unconventional monetary policy since the 2008-2009 global financial crisis (GFC). Undoubtedly, countries now have less fiscal space than in 2009, and overall borrowing, including public debt has risen since. The policy blunders since the GFC have only made things much worse. The ideologically driven case for fiscal consolidation did not boost investor confidence for a robust recovery, as promised.
Despite acknowledging false claims cited to justify fiscal consolidation, including the IMF’s admission that its early advice was based on faulty calculations, there was no recommended change in policy course. Instead, all responsibility for recovery was put on the monetary authorities who resorted to unconventional policies, especially ‘quantitative easing’ (QE). However, the global economic recovery since then has remained tepid and easily reversible.
Additional liquidity, made available by QE, has largely been used to buy financial assets and for speculation, amplifying the financial vulnerability of emerging market economies, which have experienced increased volatility. Governments also failed to take advantage of historically low, even negative real interest rates to borrow and invest to boost productive capacity in the longer term. By mainly benefiting financial asset holders, QE has exacerbated wealth concentration. Meanwhile, cuts in public services and social spending have worsened social polarization, as tax cuts for the rich have failed to generate promised additional investments and jobs growth.
The failure to achieve a robust recovery has not only worsened the debt situation, but also made lives harder for ordinary people. Growing polarization has also worsened resentments, eroding trust, undermining solidarity and progressive alternatives. But lack of preparedness can hardly be due to ignorance as there have been many such predictions recently, certainly more than in 2007-2008, before the GFC. The cooperation that enabled co-ordinated actions to prevent the Great Recession from becoming a depression has not only waned, but major countries are now at loggerheads, preventing collective action.
National political environments are also more hostile. In Europe, the rise of ethno-populist nationalism is making it harder to pursue EU-level policies and to act together to prevent and mitigate the next financial crisis and downturn. The “new sovereigntists” and false prophets of American exceptionalism are undermining multilateral cooperation when needed most. Thus, a recession in 2019 may well elevate geo-political tensions, exacerbating the negative feedback loop for a ‘perfect storm’.
(Anis Chowdhury, Adjunct Professor at Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok. Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007).
