The global economy would expand by 2.9% in 2019, the weakest annual growth rate in a decade. Output could remain low in 2020, at 3%, or fall further if the trade war worsens, Organisation for Economic Cooperation and Development predicted. The new data shows the worst projected figures since the financial crisis as the chairman of the US Federal reserve Jay Powell’s cynical remarks made headlines about the outlook of the global economy as he said: “It’s murky out there”. When Powell took the reins of Federal Reserve he was greeted by the stocks swinging wildly and major indexes plunged to more than 10 percent amid unchanged benchmark rate -market correction in New York spiraled and ricocheted to the rest of the equity markets in Eurozone and Asia.
The economies around the globe aren’t in stable waters anymore and perhaps are wading into a recessionary mode. Albeit, the US growth hasn’t gone negative this year in fact the S&P 500 and Dow are up more than 19% and 15%, respectively, the US Federal Reserve has been breathing stimulus into the economy to resuscitate the growth projections. The US central bank has cut interest rates for only the second time since 2008 financial crisis, amid concerns about slowing global growth and trade wars. The Federal Reserve lowered the target range for its key interest rate by 25 basis points to between 1.75% and 2%.Simulateneusly, just in a week the US central bank has pumped more than $270bn into the financial system – the first time there’s been such an intervention since 2008. Interest rates in the $3trillion US “repo market” shot up to 10% in some cases – although the cost of borrowing in that market more typically hovers around the benchmark rate set by the Fed – around 2%.
Theoretically cutting rates helps propel economic activity, by making it cheaper to borrow money for both businesses and consumers. However, with interest rates in the US already low by historic standards – and much of the economic uncertainty concomitantly caused by the trade war with China – analysts have questioned the vision behind the policy change.
The decoupling debate may have been enigmatic, the reality however would already have been dawned upon the political economists that the recession trajectory has caught Europe and Asia sooner than expected. The head of ifo institute, Prof Clemens Fuest, forecasted that Germany’s GDP would shrink this quarter, having already contracted by 0.1% in the previous three months. That would put the economy into a recession for the first time since 2013.Germany’s industrial sector has taken a direct hit by the US-China trade war, with exports falling in the last quarter. Manufacturing output has contracted, as factories have been hit by falling orders. The “debt brake” German government is under exorbitant pressure to respond to the fallout by borrowing more to bolster spending since it is bound to draw up a balanced budget, but some economists argue that Berlin should now launch a stimulus programme.
Caught in the quasi-recession trend, the economists in India too have been worried about its economic outlook, as the longest growth slump since 2012 is mounting concern that it may be tough for policy makers to reverse the slowdown. The indicators suggest that the growth remains elusive which has now slipped below the long term trend of 6.6% for two consecutive quarters. The GDP growth in Asia’s No. 3 economy grew 5% in April-June from a year earlier, below the weakest estimate and the slowest pace in six years. The five straight quarters of plunging growth mark the longest slump since 2012 which requires a counter-cyclical government spending boost.
A technical definition of recession in developed economies is that when the GDP of two consecutive quarters is found to be negative. These countries are resource-rich and have an enormous amount of data, therefore they are able to detect recession in the same financial year. On the contrary, recessions are interpreted differently as far as developing economies are concerned. These countries are not data rich owing to various reasons.
The case in Pakistan may not be different as the major economic indicators hint towards a recessionary dive.The large-scale manufacturing (LSM) index remained negative in the first eight months of the current fiscal year 2018-19. A slowdown in the industrial sector will have spillover effects on the services sector which, in turn, will bring down activities in the retail, wholesale, transport, communications and financial sectors. The performance of the agriculture sector has been discouraging and the output of major crops has either stagnated or declined. As a result of slowdown in economy, growth rate for 2019 is expected to be 3 percent or even less, down from 5.8 percent in 2018.
Fiscal deficit has increased to Rs 3.4 trillion at the end of June 2019 compared to Rs 2.2 trillion in June 2018- a historic deficit ever recorded. In terms of percentage, fiscal deficit has been recorded at 8.9 percent compared to 6.6 percent on June end 2018. As percentage of GDP, 8.9 percent is the highest in last 30 years and 8.9 percent also has to be seen against the government’s own set target of 5.1 percent in September last year.
Although the government has planned to transfer its cash resources to the central bank from commercial banks in a bid to slash public debt servicing cost, the state bank’s decision to keep policy rate unchanged at 13.25 % will further slow-down the economy which is inimical for any possibility of revival plan of the economy and would inversely hit the budget deficit estimates of the country. Country’s data managers may not be resourceful to predict recessions, but considering major global economies and their jittery meltdown, its time the economic managers of the country create recession resistant modalities to meet any upcoming challenges.