Sunday , October 20 2019
Home / argentina / The global economy is not in crisis, but is still vulnerable

The global economy is not in crisis, but is still vulnerable

NEW YORK – The fear of the impending recession, which generated major turbulence in the financial markets in late 2018 and early 2019, has calmed down a bit.

That's the good news. The bad news is all that has revealed this epididy of fear.

For most of the year 2018, the world economy seemed to be getting out of a quagmire in which it stagnated for a decade after a major recession and the global financial crisis. However, the era of continuous low growth, low inflation and low interest rates is not over.

The European Central Bank announced on January 24 that "the pace of growth in the short term is likely to be weaker than previously expected," and the Bank of Japan has decided to maintain its stimulus policies against the possible risks to its growth. In the US, the Fed will hold a meeting in the next few days, after which it is likely that it will decide to keep the interest rate unchanged.

So, although the world economy has given many promising signs of vitality for most of last year, the problems that have hit a decade are still there; among them, the aging of the workforce in many of the most important economies, the very low growth in productivity and the surplus in industrial capacity and global savings, in spite of the lack of demand around the world.

These factors predict a dangerous time: because growth rates are low, it is easier for economies to fall into recession and, given that interest rates are low, central banks will have less solid tools available to reduce them. the consequences of the slowdown.

"This shows that the forces that have limited many economies are much more difficult to fight and widespread than many expectations or beliefs," said Roberto Pearly, a partner in the financial research firm, "The cornerstone macro". "It is a bad news for the pay outs of workers in many countries and for those who expect a reversal of the growing trend of inequality that has lasted for several years."

Because growth rates are low, it's easier for economies to fall into a recession.

Keep in mind that markets have collapsed during the last weeks of 2018, largely because of the fears that the US Federal Reserve will raise interest rates to a greater percentage than the economy could handle (for example, if the rate is higher, people tend to spend less and are less likely to manage a loan).

What tells us that the interest rate of only 2.4 percent, the level at which the US dollar rate remained after the December increase, is enough to leave the economy on the brink of collapse?

Now that the world economy relies heavily on stimulating even small growth, there is not much room for maneuvering to mitigate a negative reaction to change. In the case of the United States, for example, there is a greater vulnerability to the possibility of falling into a recession due to several factors, such as the closure of the public administration – that ended on January 25 and lasted more than a month – or the opportunities for a commercial war like the one who drinks with China.

Adam Posen, president of the Peterson Institute for International Economics, said that "if growth and investment look so when there is a relatively loose fiscal and monetary policy, especially in the US, that means there is no firmness in the background."

"The situation can be much worse if politics becomes more restrictive without the need for it," he added. "In any case, it is worrying to think about how the world economy will be if there was no macroeconomic support" of an incentive for low interest rates and deficits.

There is a risk of generating a negative feedback cycle: the low growth in the past decade, which has caused stagnation of income, can contribute to political problems in countries such as the United Kingdom, Italy and the United States. These problems, in turn, can create new risks of a turbulent event in the economy, as happened in Washington with the recent closure of the administration.

The world economy is not in crisis; that there is little growth is better than no growth or contraction.

However, a clear lesson from recent months is that the forces that held the global economy for eleven years were not temporary: they did not disappear. As a result, the world is in a particularly vulnerable position to face bad luck or bad policy.

Thus, low global growth was not just a phase; This is the new reality that we must take before every debate and the macroeconomic issue in the near future.

Source link