Explained: What is a global recession?

Context

  • The global economy continues to be hit by bad news as one big economy after another falters on economic growth. On Wednesday, data from Germany, the world’s fourth-biggest economy, showed that its GDP contracted by 0.1% in the April-June quarter (Q2). Ongoing trade tensions between the US and China, and the uncertainty due to Brexit have impacted German exports badly. Germany is the world’s third-biggest trader after the US and China.

What is a global recession?

  • In an economy, a recession happens when output declines for two successive quarters (that is, six months). However, for a global recession, institutions such as the International Monetary Fund tend to look at more than just a weakness in the economic growth rate; instead, they look at a widespread impact in terms of employment or demand for oil, etc. The long-term global growth average is 3.5%. The recession threshold is 2.5%.

What has triggered the alarm?

  • Earlier this month, the US declared China a “currency manipulator”. In other words, Washington accused Beijing of deliberately weakening the yuan to make Chinese exports to the US more attractive and undercut the effect of increased US tariffs.
  • The intensifying trade war between the two has the potential to derail already weak global growth, and the signs are evident. For instance, the global manufacturing Purchasing Managers’ Index (chart 2) and new orders sub-index have contracted for the second consecutive month in July; they are already at a seven-year low. Further, the global capital expenditure cycle has “ground to a halt” (chart 3); since the start of 2018, there’s been a sharp fall-off in nominal capital goods imports growth. (That is, there’s a decline in capital investment in anticipation of reduced demand.)

How can this lead to a global recession?

  • The German slowdown is a very good example. The absolute volume of global trade has stagnated and, in terms of percentage change, trade is contracting. What is worse is the composition of trade that is being hit — and is likely to be hit further. According to Morgan Stanley, two-thirds of the goods being lined up for increased tariffs are consumer goods. Higher tariffs are not only likely to douse demand but, crucially, hit business confidence. The apprehension is global trade uncertainties could start a negative cycle, wherein businesses do not feel confident enough to invest more, given the lower demand for consumer goods. Reduced capital investment would reflect in fewer jobs, which, in turn, will show up in reduced wages and, eventually, lower aggregate demand in the world.
  • What makes this scenario trickier is the fact that monetary policy is already loose — that is, borrowing money is cheap. A recession now will be more difficult to salvage.

What about India?

  • As chart 4 shows, India’s trade is already suffering, and jobs are being lost. For an economy that is struggling to find a domestic growth lever — government and businesses are overextended and household (that is, private family-level) consumption is down — exports could have provided a respite.

What can India do to boost exports?

  • A 2016 analysis by HSBC global research showed that domestic bottlenecks were more responsible for India’s lack of competitiveness in exports than the lack of global demand and the overvalued rupee put together. In other words, addressing bottlenecks such as better roads, more electricity, easier rules of doing business etc., will go a long way in boosting exports.

Source:IE