Op-Ed

Focus | Is a global recession coming?

Is a global recession coming? The short answer is no one really knows. However, the likelihood of a U.S. recession and a global recession is higher now than it has been for the past several years. Many economists are predicting a recession within the next eighteen months. According to a National Association for Business Economics (NABE) August survey, of the 226 members surveyed, most of whom are economists, the majority (about 63 percent) believe that a recession in the U.S. is coming either in 2020 or 2021. For many economists, one of the most significant contributors to that coming recession is the drawn-out trade war between the U.S. and China. According to a Reuters’ report, “Morgan Stanley forecasts that if the U.S. lifts tariffs on all imports from China to 25 percent for 4-6 months and China takes countermeasures, the U.S. would be in recession in three quarters.” Looking at an inverted yield curve in the U.S., financial analysts see that as another sign that a recession is coming. In fact, global bond markets are showing a similar characteristic.

A recession will be bad news for the U.S., the world and The Bahamas. It may even be worse than what we saw in 2007/2008, because the world’s economy remains fragile since that recession. Also, the tools available for policy makers to stave off a looming recession are already strained. Remember, interest rates remain low and money remains available. This is a combination that usually makes for global economic growth. However, even with these favorables, the growth of the world’s economy remains subdued. If there is decline, what tools will policy makers use for encouraging growth? Lower interest rates? The U.S. has rates of around 2 percent, the UK around 0.75 percent, Japan at negative 0.1 percent and Canada 1.75 percent. At such low rates, the room for maneuvering is really limited.

Quantitative easing, in which central banks buy up government bonds to inject cash into the economy, will not be useful in economies already flooded with cash, as several developed economies are. If the recession happens and is deep, the policy response to counter it will be challenging.

The Bahamas and small economies like it remain injured by the financial crisis of 2008. Unemployment remains high; credit portfolios remain strained and lending low; government finances remain tight and general business remains embattled. Taking another hit from a global recession will be like facing another hurricane after being directly hit by one just months before. While The Bahamas is probably better poised to withstand the hit than others, it can ill-afford to experience such a hit.

What is necessary in the face of possible recession? It is necessary for households to sure up their cash reserves with as much savings as possible. It is necessary to boost customer service for greater earnings and build cash reserves. It is necessary for the government to be efficient in facilitating business activities and be prudent about fiscal management, dedicating scarce resources to investment activity and easing where possible the burden of taxation on the public at large. In a recession, cash is king and prudence is queen. Together they can help us all endure the difficulty of what will be, a terrible economic decline should it come about. Of course, the U.S. and China can both help by ironing out this trade dispute as quickly and as amicably as possible. They could also take the whole matter to the World Trade Organization dispute settlement mechanism, and let it do what it was designed to do, to avoid exactly what we are seeing today, where confusing fiscal policies are on the verge of producing harmful disruptions in the global economy.

 

• Zhivargo Laing is a Bahamian economic consultant and former Cabinet minister who represented the Marco City constituency in the House of Assembly.

 

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