In recent months, many articles have raised the potential for a net slowdown in global growth that could occur by 2020. Nouriel Roubini, a recognized professor at the University of New York, who had already predicted the 2008 real estate crisis, expressed his concern in an article published on the Project Syndicate website in October 2018, updated since, in which, together with Brunello Rosa, he explained ten factors referring to preparing for the future crisis. What is the real situation and should these concerns be taken seriously?
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What is the current situation?
As for the United States, it may be surprising to believe in a possible recession at a time when the US economy is unhealthy and is going through the longest growth phase in today’s history, with 2.1% growth in the third quarter and an unemployment rate of 2.7%. In fact, it seems that the US economy is close to overheating, both thanks to Donald Trump’s tax incentives and EDF’s lower interest rates under pressure from financial markets and the US president, who sees the economy as an important argument for the campaign.
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On the European side, where the current growth period is much younger, the situation is equally ambivalent. While countries like France manage to maintain reputable growth rates, Germany is particularly suffering from the trade war. Since almost 50% of GDP is exported, the engine of the European economy has been severely weakened for a decade. At the moment, Italy is experiencing a political crisis that frightens financial markets and investors, while Brexit is drawing a dark future for the economy, which is likely to experience a significant decline in GDP after leaving the Union, according to a study by the United Kingdom of Finance.
In short, despite the Commission’s reassuring forecasts of 1.4% growth in 2020, confidence is deteriorating and numerous indices indicate a slowdown in the future which prevents the necessary normalization of the ECB’s monetary policy.
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As far as developing countries are concerned, the situation is very different. While countries like India continue to grow significantly (around 7% for India), the major change is the result of the situation of the Chinese economy, whose slowdown is now visible and is beginning to affect the entire Asian economy.
According to economists, what are the most important concerns?
Many believe that the main risk that is currently poorThe world economy, especially developed economies, lies in significant over-indebtedness, depending on the whims of the main changes in interest rates . Indeed, the decade of low (if not zero) interest rates introduced by central banks, strongly favours the indebtedness of economic operators (states and enterprises) by reducing the cost of money (or the costs borne by a borrower). This has led to an explosion of global debt, which now represents nearly 225% of world GDP, or $182 trillion, to the point where IMF experts are alerted.
As long as interest rates remain low, this debt will remain viable. Not only do these low interest rates encourage governments to raise excessive debt, as Georges Ugeux, former Vice President of the New York Stock Exchange complained, but a sudden rise in inflation or a desire to normalize economic policy could significantly weaken the global economy. This would force central banks to sharply raise interest rates and increase the risk of bankruptcy of agents (an almost classic “Minsky Moment”).
other hand, the weakening of China’s economic situation and its changing nature also weigh on global growth. So far, with its very high growth rates, it has contributed to significantly increasing trade and global growth. However, its current slowdown (less than 7% of TCAM in 2018) reflects the rise in tensions in the Middle East and its impact on oil prices (such as the recent supply shock resulting from the attack on Saudi oil sites), or the change of power in the labour market that could be resulting from this recovery in inflation, said Patrick Artus. The transition from an export investment model to a more sustainable model based on domestic demand and the inefficiency of investments in China financed by significant domestic savings. On the
How can we talk about risksfor the world economy without mentioning trade war
After all, there is a monetary risk. If the dollar loses its as an international reserve currency for political or economic reasons, it could also affect global growth. In fact, 62% of the world’s financial reserves are invested in dollars, making it the United States allows for a chronic external deficit and high external debt: ongoing between China and the United States, when Donald Trump just threatened China with a harder trade war? The US’s refusal to accept any form of transfer of power as an economic superpower means measures that impede international trade and threaten the functioning of global value chains. This climate of international tension also raises fears of lack of response or international cooperation on this subject, spontaneously developed in 2008 in the event of a global crisis. The loss or weakening of this status would force them to eliminate this deficit by reducing consumption, leading to a very negative international demand shock.
As we know, trust plays a key role in the economy . However, over the summer, U.S. markets fluctuated sharply, reflecting the current uncertainty and climate of mistrust for the future prosperity of the global economy.
In such a case, will we have the necessary weapons to respond on time and adequately?
The main concern lies in the great uncertainty: could economic organisations, especially central banks, respond to a possible major crisis?
Central banks and other financial institutions have used all sorts of means to cope with the 2008 crisis and prevent their spread. This led to a sharp drop in interest rates, which have reaches an extremely low level until the liquidity trap is approached, as well as an explosion in the balance sheet of central banks that limit their responsiveness.
The recent fall in the key rate of the EDF (this summer) and the ECB (early September) as part of the economic support measures raises concerns about the impossibility of a return to standardized monetary policy and hence even less reactivity on the part of central banks. In other words, in the event of a crisis, lowering policy rates may not be enough to have a real impact on the economy
. on the other hand, the image of the financial sector has changed over the past decade, making it difficult for a government to implement bank bailouts according to the subprime rise to justify.
After all, budgets remain the most important tool to absorb fluctuations. If a recession were to occur, they would be at the forefront of financing measures to support the economy. However, the explosion of government deficits and debt over the past decade has significantly reduced the flexibility of governments.
In short, only the future will tell us whether these concerns will arise. This will depend above all on the evolution of monetary policy over the coming months and on the confidence of economic operators in the actions of central banks and governments. Although the next crisis certainly stems from pessimistic and self-realistic reactions from economic operators, it is uncertain whether the global economy and economic institutions have the necessary weapons to react quickly, as they did in 2008. Rates of lower interest could prolong the expansion, but to what extent?