Global economy: Time to pay the piper

On the decennial of the financial meltdown of 2008-09, global economy remains in a febrile state. After throwing the proverbial kitchen sink at the crisis for over a decade, the selfsame bad debts and trade imbalances continue to stare us in the face.

In fact, the International Monetary Fund, the ECB, the OECD and some of the biggest fund managers across the globe are predicting a global economic slowdown in 2019, with attendant risks of a new crash or prolonged recession lasting decades.

Toward a lower ‘normal’

Ironically, global stock and credit markets are said to have already suffered their worst year in 2018 since the Great Recession. Even the growth of the celebrated Chinese economy fell to its lowest level in a decade in the third quarter of 2018, when it dropped below the already managed expectations of around 6.6 percent.

Even this level was secured after China infused a vigorous set of stimuli to revive flagging industrial production, retail sales and tardy investment in real estate and infrastructure. Similarly, the Indian economy has been showing signs of distress in its agrarian and financial sectors, which have been attributed to the debacle of the ruling NDA government in recent state elections of the country.

Global fund managers are as bearish today as they were at the time of the financial crisis of 2008

Dr. Adil Rasheed

Meanwhile, the vaunted German economy showed its first contraction since 2015, when it slipped by 0.2 percent between June and September of 2018. It is worth noting that the entire Eurozone remains on tenterhooks as its second biggest economy (the UK) prepares to leave the bloc and countries like Italy and France agitate against the EU’s austerity directives.

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When it comes to the US economy, where growth and employment figures showed an uptick last year, the effects of President Trump’s fiscal measures (mainly tax cuts) appear to be wearing off with growth slowing in the third quarter of 2018.

Tensions between the President and Federal Reserve chairman Jerome Powell over the central bank’s plans to hike interest rates that might lead to the dreaded yield curve inversion has started spooking investors. The decline in US real estate, as well as a fall in auto and retail sectors is also seen as ominous trend for the economy.

Bearish across the board

In fact, global fund managers are as bearish today as they were at the time of the financial crisis of 2008, according to a Bank of America Merill Lynch survey published in late October 2018. Meanwhile, Bloomberg reports that it is the first time that all four asset classes — stocks, bonds, money markets and property — have posted negative total returns since 2008, with junk bonds reporting their worst month in December 2018, since 2011.

It is in the wake of these distress signals that oil prices (both Brent and WTI) have lost more than a third of their value since the beginning of October 2018. It is noteworthy that oil is often seen as the barometer of global economic prospects.

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Several reasons have been given for the downturn, ranging from protectionist policies and trade wars to rising debt-to-GDP levels and technology-driven market disruptions, etc.

However, it can be argued that these causes are themselves symptoms of a deeper malaise. The reason for many of our present political and economic problems is that many governments today have a lower threshold of pain.

The price of populism

Economic downturns should be viewed as important phases of correction that weed out the accumulated excesses and toxic overgrowth of prosperous times. However, attempts by fretful governments to rescue unproductive and corrupt private and public sector enterprises invariably cause systemic anomalies leading to prolonged distress and bigger economic disasters.

The phenomenon of ‘too big to fail’ is against the values of free-market capitalism and not the result of it. The job of governments is to provide the best infrastructure, along with an effective legal, institutional, policy and regulatory framework for a free market economy to operate.

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Unwarranted state interventions through excessive money printing, fiscal overspending in populist programs and subsidies, etc. lead to higher indebtedness, inflation, creation of asset bubbles and market volatility — the very measures most economies took to offset the Great Recession of 2008.

In fact, the real problem lies in not paying the Piper his due and in adhering to St Augustine’s dictum: “Lord, make me chaste, but not yet!”

_____________________
Dr. Adil Rasheed is Research Fellow at the Institute for Defence and Strategic Analyses (IDSA) based in New Delhi since August 2016. For over 20 years, he has been a journalist, researcher, political commentator for various international think tanks and media organizations, both in the United Arab Emirates and India. He was Senior Research Fellow at the United Services Institution of India (USI) for two years from 2014 to 2016, where he still holds the honorary title of Distinguished Fellow. He has also worked at the Abu Dhabi-based think tank The Emirates Center for Strategic Studies and Research (ECSSR) for eight years (2006-14).

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Last Update: 10:48 KSA 13:48 - GMT 10:48
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