- January 17, 2019
- Posted by: admin
- Category: Business plans, Finance & accounting, Uncategorized
A decade after the Great Recession of 2008 that gripped the world for almost two years, fear looms large of a new economic downturn and economists anticipate it to begin by the end of 2020.
In fact, two-thirds of business economists in the United States expect the next downturn to begin by late 2020 and hit 2021 badly. However, their forecast says that the economic recession this time might not be as harsh as the last one, which had resulted in the deepest decline in GDP of any recession since the Second World War.
Economists believe that the global economic expansion will continue in early 2019, provided that the US economy is running a fiscal deficit, China is pursuing loose fiscal and credit policies, and Europe remains on a recovery path. However, as the positive impact of the tax cuts passed in late 2017 will fade gradually, tightening the financial condition of the US, economists are expecting the US and global economy to suffer a gradual slowdown in 2019 and finally slide into a recession by the end of 2020.
According to a Goldman forecast, the US GDP growth will slow to 1.8% in the third quarter of 2019 and to 1.6% during the fourth quarter. However, Goldman predicts the next economic recession primarily from 2021.
But many other economists paint a bleak picture of the global economy from 2020 itself. Larry Summers, a Harvard economist who was also the treasury secretary during the Clinton Administration, believes that there exists an almost 50% chance of a recession by 2020.
Not only economists, a majority of chief financial officers (CFOs) in the US believe that the next economic downturn will begin in 2020.
In a recent Duke University/CFO Global Business Outlook Survey, almost half of CFOs in the US said that an economic recession will strike by the end of 2020. “The end is near for the near-decade-long burst of global economic growth,” Duke finance professor John Graham said in a statement.
The forecast by CFOs and experts is backed by a number of ‘logics’ that hint toward an economic downturn in the near future. Primarily, the US fiscal-stimulus policies that have been pushing the economic growth in recent years will not be sustainable and will run out soon. This will basically pull down the current economic growth in the US to below 2%.
Similarly, the US economy today is overheating and inflation rate has crossed the set cap. This will add pressure on interest rates and the US dollar as the US Federal Reserve will likely continue to raise the federal funds rate from its current 2% to at least 3.5% by 2020. The major central banks will follow the Fed toward monetary-policy normalization, which will reduce global liquidity and put upward pressure on interest rates.
On these bases, the Organization for Economic Cooperation and Development (OEDC) has already lowered its forecast for global economic growth from its earlier projection of 3.7% to 3.5% a few weeks ago.
Likewise, initial jobless claims are among the five most relevant indicators of a coming slump, according to Bank of America economists. A recent job report by the Bank of America has shown that job gains had slowed slightly. Still, unemployment is very low, wage growth is finally above 3 percent, and the participation rate is stable.
“We can’t ignore the pickup in claims, but I don’t think it’s a decisive enough shift to conclude that the labor market is slowing in a troubling fashion,” said Michelle Meyer at the Bank of America.
Different other economic downturn signals highlighted by the Bank of America include auto sales, industrial production, the Philadelphia Fed index, and aggregate hours worked. Some of those are weakening, but none are falling off the cliff.
“Indicators show a 20 to 30 percent probability of a 2019 downturn, while their gauge based on economic data puts the chance at less than 10 percent over the next 6 months,” according to Bank of America officials.
Business sentiment gauges have softened recently, and this is another fact that has forced experts to project higher possibility of an economic downturn by the end of 2020.
On the other hand, the US stock market, which had been rising steadily in 2016 and 2017 and appeared to be continuing its upward trajectory in 2018, has been dipping in the past few months, leading to the New York Stock Exchange’s worst Christmas Eve ever.
The losses arrived basically as President Trump attacked the Federal Reserve, which had hiked its benchmark interest rate a quarter point. Trump made repeated attacks on the Federal Reserve as it kept raising interest rates throughout the year.
“The market is lacking full confidence in the Fed right now, but part of it is Trump’s undermining of it,” said Stephen Myrow, a managing partner at Beacon Policy Advisors.
Besides these factors, inflation is surging in different other key economies and the fluctuation in oil price has been adding inflationary pressure. Under this pressure, central banks across major economies are likely to follow the Fed toward monetary-policy normalization, which in turn will bring down the global liquidity and put upward pressure on bank interest rates.
The other point to be noted is the restrictive policy adopted by the Trump Administration that restricts both inward and outward investments and technology transfers, which is likely to affect the supply chain. The administration has been restricting immigrants who have been playing a crucial role in the US economic growth.
Most importantly, major economies including China and Europe are likely to witness a slowdown in the next few years as they will see fit to retaliate against US protectionism. Similarly, global economies, including Europeans, will see a downward growth owing to monetary policy tightening and trade frictions. Moreover, populist policies in countries including Italy might lead to an unsustainable debt dynamic within the eurozone. Furthermore, the unresolved ‘doom loop’ between European governments and banks holding public debt will amplify the existential problems on an incomplete monetary union with inadequate risk-sharing.
In light of all these conditions, a global economic downturn seems to be inevitable within next two years.