The end of this week will showcase two important events for
global economic governance. First, central bankers, leading academics and
representatives of international organizations from around the world will meet in Jackson Hole, Wyoming starting Thursday. Then, over the weekend,
leaders from the Group of Seven (G7) will gather in Biarritz, France. High on both agendas will be an analysis of the latest
economic indicators that seem to point to an acceleration of the global
economic slowdown and the risk of a looming global recession.
The leaders will be confronted with difficult questions -
including whether the fears of a recession are duly justified. They will also
reflect on the consequences of a potential recession, not only in the
short-term, but also in the long-run for our economies, societies and political
systems.
Last
week, an array of economic indicators set off alarm bells for investors that a
new global economic crisis could be at hand. Germany, the economic engine of
Europe, recorded a drop in its gross domestic product during the second quarter
of 2019; expectations are that its economy will contract again in the third
quarter and enter into technical recession. Meanwhile, earlier this month the
US bond yield curve turned negative - that is, the cost of borrowing money for
the US government was lower over the longer- than the shorter-term. This is an
obscure financial construction, but it is broadly regarded as a good predictor
for future economic recessions in financial markets.
Nonetheless,
a new global economic recession does not need to be the end result. Our
economies can build on some important strengths. Currently, most economies
continue to grow, and employment rates in the US and Europe are at record-high
levels. Wages, notably in the US, have started to finally rise, and many
companies have large amounts of cash that should help them navigate any
short-term storms.
Still,
we should not underestimate the severity of the looming risks in terms of a
global trade and currency war, a disorderly Brexit process or financial
vulnerabilities in certain companies due to high levels of accumulated debt. If
these risks intensify or materialise, we could enter a new global recession.
The consequences could be dramatic - not only for economic activity and the
long-term competitiveness of our economies, but also for widening the inequality
gap. During economic downturns, those segments of the population that are
already more vulnerable tend to be disproportionately affected because they may
lack the necessary skills to adapt, access to new opportunities or the
financial resilience to cope with temporary headwinds. This danger is
particularly acute today as our societies have not yet recovered from the
consequences of the 2008 financial crisis, which added to already unsustainable
levels of inequality in many of our economies.
Avoiding
a new global recession will require a concerted effort from governments and
businesses around the world. Governments will need to coordinate their monetary
and fiscal policies to stimulate demand in the short-term, even though many of
the tools at their disposal were exhausted during the previous recession.
Measures to continue ensuring the flow of cheap money and fiscal stimulus
programmes through an increase of public spending or a reduction of taxes,
depending on the fiscal space of each country, are potential options. Depending
on the severity of the risks ahead, governments may be pushed into unchartered
waters in terms of monetary and fiscal policies. In addition, governments
should not fail to take a long-term vision and continue to invest in those
productivity-enhancing assets that will allow them to reap the long-term
benefits of the Fourth Industrial Revolution and safeguard their
competitiveness.
Businesses,
within their ability, will need to avoid overreacting and cutting investments
too much and/or too fast, affecting their long-term survival, or unnecessarily
firing employees. Mechanisms to increase flexibility - such as reducing the
numbers of hours worked per employee, instead of reducing the number of
employees, as Germany did during the recession of 2008 - can help to achieve
this.
Source: Weforum