Issue :   
Happy Dussehra and Diwali to all Readers.          October 2019 Edition of Power Politics is updated.
Issue:June' 2019


Global economic outlook


Is the global economy headed for a recession in the next 12 months?
A survey among over 200 economists showed that they fear the current slowdown in global economic growth could slide into recession. Investors and markets observers have been sounding more and more gloomy in their economic predictions. This is more like a warning to policy makers in leading economies, including G-20 member countries, to take proactive measures to allay such fears.

The RBI Governor in a recent statement has tried to ally apprehensions about an impending economic recession.”Despite rising external risks, domestic economy is resilient”. At the same time, he called for more structural reforms since there is not much room for fiscal measures. This RBI statement came on the heels of the government announcing a massive reduction in corporate tax (foregoing almost Rs 1.4 lakh crore in expected revenues).

Both the government cutting corporate taxes and RBI Governor’s attempt to talk up the business sentiment are a welcome move. Often a recession is fuelled more by widely shared negative sentiments that turns into panic, causing investors to turn away from new investments, cutting costs and hiring.

Besides talking up the investor and consumer confidence, India and several governments have swiftly moved to ease liquidity through cuts in interest rates by their central banks. The New York Fed has even intervened by making available $75 billion on a daily basis for short term borrowing by banks, and the EU central bank has decided to pump in billions of Euros to ease bank credit. Would some of such easy money flow towards India and perk up business sentiment?

The competitive rate cuts by central banks across countries, along with the Global Economic Outlook report lowering its forecast of global growth rate from 3.4 per cent to 3.2 per cent, clearly show that the world could be headed for a period of fairly long slowdown. Even the German economy is slowing down, along with that of China (less than 6 per cent next year), India showing a little over 6 per cent growth rate last fiscal.

The word ‘recession’ technically refers to two consecutive quarters of negative GDP growth that could slide into recession. Another definition followed by the US National Bureau of Economic Research says a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale and retail sales. This latter, broader definition better captures the economic slowdown experienced in most economies including that of India.

What had caused particularly widespread concern about the global economic slowdown is the persistent declines in the manufacturing activity. This decline is exacerbated by the under-performance of global trade beset by President Trump led tariff and other restrictions imposed on China, US allies and on friends like India. This trade war theme has become part of the American presidential election campaign that will not end before December next year.

Therefore, peace on global trade front may come only some time later in 2021.

President Trump has also picked a quarrel with Iran over the multilateral nuclear deal concluded in 2013, leading to tension in the Hormuz Sea, a key shipping lane for the outflow of oil from Saudi Arabia (accounting for 15 per cent of global supplies) and other Middle East suppliers. An American think tank-IHS Country Risk-points out that four of 10 major international risk or hot spots, are in the Middle East. They are Iran-Saudi confrontation, (backed by the US), and rise of Islamic State actors in Saudi Arabia, Kuwait, Bahrain and Syria.

Continuing Taliban terror activity in Iraq, Afghanistan, and internal instability in many of these countries keeps the entire region volatile. Uncertainty in oil supplies and spike in oil prices could not have come at a worse time for the ailing global economies.

The UN global outlook report adds two more uncertainty factors: the first relates to the climate change that is taking a toll of the GDP in the form of droughts, floods and hurricanes. The second is the Brexit drama that has unsettled the European Union.
In the last few weeks, well-known economists have raised questions about the efficacy of financial liquidity easing steps like rate cuts and business tax cuts for fixing the present economic downturn.
In their opinion, those measures worked for dealing with the financial crisis of 2007-08, that was caused by factors very different from the reasons for the present looming recession. Partially, the present slowdown is geo-politics induced, meaning trade wars, Brexit and the like. Worryingly no set of policy wonks or relevant UN agencies have come up with a bunch of alternative action plans for stemming the world economic downturn.

The Climate Change

On 20th September last, millions of young people, including school goers, marched in the streets of cities across continents demanding from their governments immediate action for reversing climate change.This protest was taking place ahead of a UN Summit on Climate Change in New York.

The Climate Change has become an existential threat to the earth and all specie inhabiting it, and recognised as such by most g o v e r n m e n t s except the present one in W a s h i n g t o n , responses for reversing it also pose an e x i s t e n t i a l threat in some ways. The cover story of the E c o n o m i s t m a g a z i n e r e p r o d u c e d here captures this eloquently why this is so.

Young protestors chanting slogans and carrying banners during a global climate rally at Pershing Square in downtown Los Angeles (US). This weekly ‘s cover page shows the drastic changes (Red) in global temperature beginning from 1971. Focusing on the causes for climate change that are built into the foundations of the world economy and of geo-politics, the magazine explains the measures needed to overhaul the entire global economy.
The political leaders are now caught between a hard place and a rock as they are called upon simultaneously to act for reversing the current global economic slowdown as well as to act to reverse climate change.

(The writer is former Information
Adviser to PM)