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.
The two biggest economies are already in some trouble. The US has grown by just 2.1% in Q2 of 2019 as against 3.2% in Q1. China’s growth has been decelerating for longer.
So, is a global recession likely?
Earlier this month, researchers at Morgan Stanley, a leading investment bank, warned that if the US and China continue to raise tariff and non-tariff barriers over the next four to six months, the global economic growth rate will fall to a seven-year low of 2.8% and worse still, the world economy could enter a recession within the next three quarters (that is, nine months). The last massive downward spiral in the global economy happened in the wake of the great financial crisis of 2008, and continued until 2010.
What is a global recession?
In an economy, a recession happens when output declines for two successive quarters (that is, six months).
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.
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?
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.