Moscow, July 5 — “Conduct. Economy” “Last summer together with my colleague Brunello Rosa, we have identified ten potential risks that can trigger a U.S. and global recession in 2020. Nine of them are still in effect”, writes Professor of Economics at new York University Nouriel Roubini.
In his article on Project Syndicate, he writes that many of these risks are associated with the United States. A trade war with China and other countries, as well as limiting migration, foreign direct investment and technology transfer, may very deeply affect the global production chain, raising the threat of stagflation (slowing growth amid higher inflation). And the risk of slowdown of the economy in the US is now worsened because the incentives of the tax laws enacted in 2017, run out of steam.
After the publication of our article the US stock markets continued to bubble. And there are additional risks associated with the flourishing of new forms of borrowing, including in many developing countries, where a significant portion of the debt is denominated in foreign currencies. And because the ability of Central banks to act as lenders of last resort becomes more and more limited, illiquid financial markets are vulnerable to sharp downturns (flash crash) and other such failures. The reason for such failure may give, for example, the President of the United States Donald trump if he would be tempted to organize a foreign policy crisis (as in the movie “wag the dog”), for example, with the participation of Iran. It can boost the ratings of trump in the country, but also can cause the oil shock.
Outside of the United States concern the precarious growth in the debt burdened China and some other developing countries, as well as economic, political, financial, and political risks in Europe. Worse, in developed countries, the Arsenal of responses to the crisis remains very limited. Monetary and fiscal policy intervention and private sector support, which was applied after the financial crisis of 2008, today simply can not be used with the same efficiency.
The tenth factor, which we wrote about, was the discount rate of the Federal reserve USA. If they raise rates in response to Pro-cyclical fiscal incentives introduced by the authorities trump the fed’s then — in January — launched their course. We can assume that the fed and other major Central banks likely to cut rates, trying to cope with various shocks in the global economy.
Trade war and potential spikes in oil prices risks are on the side of the market, but at the same time they pose a threat to aggregate demand, and hence the consumption growth rate because of the fee and the increase in fuel prices will reduce the size of disposable income. With such strong uncertainties the company is likely to prefer to reduce their capital expenditure and investment.
In such a situation serious enough shock can start a global recession even if the Central banks will be able to quickly respond. In 2007-2009, the fed and other Central banks reacted actively to the shocks that triggered the global financial crisis, but was unable to prevent the “Great recession”. Also today, the fed begins the policy rate unchanged at 2,25-2,5%, while in September 2007 it was 5.25 percent. In Europe and Japan rates are already in negative territory, Central banks will have to assess the limits of their ability to further reduce rates below zero. And given that their balance sheets are already bloated due to several rounds of quantitative easing (QE), Central banks face similar constraints of their own capabilities if they want to return to a policy of large-scale asset purchases.
As regards fiscal policy, most developed countries, the size of the budget deficit and the national debt today is even higher than before the global financial crisis, which leaves them a great space for spending to stimulate the economy. And as we wrote with Rose last year, “the allocation of money to rescue the financial sector will be impossible in countries with a latter-day populist movements and nearly bankrupt governments.”
Among the risks that could provoke a recession in 2020, special attention should be Sino-American commercial and technological war. There are several options of further escalation of the conflict. Trump administration may decide to impose duties on Chinese exports worth $300 billion, which is what these fees are not covered. Or, for example, a ban on the use of American components by Huawei and other Chinese companies could trigger a full-scale process of de-globalization, as companies will try to protect their production chain. If this happens, China will have few options for retaliation against the United States. For example, it can close its market for American multinationals, like Apple.
In this scenario, the shock to markets around the world will be strong enough to lead to a global crisis, regardless of what the major Central banks. Because the current contradictions have already begun to undermine the business, consumer and investment confidence and slow growth of the world economy, a further escalation will push the world into recession. And if you remember on the extent of private and public debt, a consequence of this recession is likely to be a new financial crisis.
Trump and Chinese President XI Jinping know that the prevention of the global crisis in the interests of their countries, so they have incentives to find a compromise in the next few months. However, both sides continue to strengthen nationalist rhetoric and take action on the principle of “an eye for an eye”. And trump, and si, apparently, believe that long-term security of their countries, economic and national — depends on their ability not to blink before the threat of a new cold war. If they both really believe that the first to blink opponent, then the risk of a destructive collision is really high.
It is possible that the trump and XI Jinping will meet for talks during the summit of “Big twenty” on June 28-29 in Osaka. But even if they do agree to resume negotiations, a comprehensive agreement to resolve the many contentious issues will remain very far from achieving. Both countries are drifting in opposite directions, so the space for compromise between them is narrowed, and the risk of a global recession and crisis in the global economy, whose condition is already fragile is increasing.
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