The possibility of a worsening global economy

Yet the current global crisis we are facing now is to a considerable extent, a “man-made disaster” caused by extreme policies. One of the most obvious examples is the global trade war initiated by the Trump administration.

Eleven years after the financial crisis, the global economy is once again experiencing an overall slowdown. The problems faced by the global economy are mostly man-made. The financial crisis in 2008 was caused by a problem in the financial system, yet the current global crisis we are facing now is to a considerable extent, a “man-made disaster” caused by extreme policies. One of the most obvious examples is the global trade war initiated by the Trump administration.

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Taking a step back to look at the bigger picture, the cause of the trade war is related to the problems faced by globalisation. However, regardless of how intense the trade war turns out, it would be difficult to reverse and completely subvert the general trend of globalisation. The Trump administration’s insistence on a trade war has inflicted great damage upon the global economic system. The trade war is not only happening between the US and China, the two largest economies in the world, as the former has also expanded its trade battles to Europe, Japan, Mexico, India and other countries. This all-rounded assault strategy is not only not helpful to the US but also drags down the global economy.

Many investment bank economists have begun to issue warnings on the global economy. Chetan Ahya, chief economist at Morgan Stanley, warned that if the trade disputes escalate, “we could end up in a recession in three quarters”. According to Ahya, “investors are generally of the view that the dispute could drag on longer, but they appear to be overlooking its potential impact on the macro outlook”. These would include the increase in tariffs, which will lead to increased costs, slower consumer demand, and corporate cuts in capital expenditures, and all these factors will affect economic activity. The global economy may fall into recession as soon as nine months later. He urged investors not to underestimate the impact of the escalation of a trade war on the global economic cycle.

Goldman Sachs lowered the US economic growth forecast for the second half of the year to two percent from 2.5 percent. It is also believed that the Federal Reserve might not be able to refuse cutting interest rates. Goldman Sachs noted that there is now a 60 percent chance of the US placing a new 10 percent tariff on the final $300 billion worth of Chinese imports, instead of the earlier 40 percent chance. In addition, there is also more than 50 percent chance the US would impose a 10 percent tariff on all Mexican products. The resulting possibilities are that the US economy will slow down to two percent in the second half of this year, and chances of cutting interest rates could increase.

Economists at JPMorgan Chase also say there is a 40 percent likelihood now, compared to 25 percent a month ago, of America facing a recession in the second half of this year. The global economy might experience a significantly sluggish trend in the long-term.

The Fed’s internal concerns about the economic slowdown are also increasing. St Louis Federal Reserve Bank President James Bullard said that the uncertainty of global trade is likely to slow down the economic growth beyond the expectations. He cited the inverted yield curve as reflecting the current high policy interest rates, and that the Fed may soon have a reason to cut the rates. Fed Reserve Chairman Jerome Powell’s latest speech on June 4 made it clear that the Fed will take appropriate measures to maintain a sustained economic expansion. He said that, “we do not know how or when these (trade) issues will be resolved … we will act appropriately to sustain the (economic) expansion”.

The strong stance of the Fed chairman immediately stimulated a rise in the capital market, but whether this short-term upswing can continue is questionable, as policy stimulus will not be able to bring changes in economic fundamentals. As Morgan Stanley warned, the damage of the trade war on the economy is pervasive. Even if central banks around the world stimulate the economy with loose monetary policies, it will cause trade activities to take time to rebound due to the lagging effects of a loose monetary policy. Hence, the warning of a global recession is not something that is being exaggerated.

The impact of the trade war as felt by entrepreneurs is different from that felt by economists but its conclusions are the same. Hon Hai Group chairman Terry Guo warned that the world’s economy will change dramatically in a matter of months or weeks, and that a “tsunami” bigger than the financial crisis is brewing. Guo learned that many SMEs in the global industrial chain have reported that they are not getting orders. The seriousness of this problem has exceeded everyone’s expectations. He bluntly said that if the US and China do not cease the disputes, the impact in the future will be unimaginable. He also warned that it is not only the manufacturing industry that is affected, as stock prices, the exchange rate, SMEs and even the future consumer economy will be greatly impacted. Guo revealed that he made a lot of calls to Hon Hai’s customers and suppliers in the US and Japan, as well as to economists and financial scientists, and everyone shares the same pessimism about the current economy.

Final analysis conclusion

Dynamically tracking the progress of the trade war and the changes in the global economy will show that the dark clouds of an impending global economic recession are becoming dense. If the trade war between China and the US does not stop urgently, and if an agreement is not reached through negotiations, the outlook for the global economy will be quite pessimistic. If there is any destructive intervention, there would be a bigger possibility for the global economy to worsen.

Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing

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