Tue | May 26, 2020

Briefing | Global recession looming in 2020

Published:Wednesday | August 21, 2019 | 12:00 AMDr Andre Haughton/Contributor

Are we headed towards a global recession?


There is widespread speculation that a global recession is on its way in 2020. The uncertainty surrounding dampening global output arosein light of an ongoing trade war between USA and China. Each country has imposed tariffs on some goods produced by the other resulted in higher final cost price to the consumer and higher cost of production for many firms and as a result, less output and less demand. Speculators believe that if this trade war continues in a reactive downward pattern, global output next year might be less than output this year. The US has already seen a 2.1% reduction in output during the second quarter of this year.


What is a recession?


By definition, a recession is a decline in GDP from one period to the next. It is basically the opposite of economic growth. A recession is natural part of the business cycle. Businesses normally traverse through boom and bust cycles where productive activity peaks and gradually declines and enters a trough which is the recession period. There are signs that a recession might be on its way.


What are the signs?


One of the most profound signs is what investors refer to as an inverted yield curve. The yield curve shows the relationship between interest rate and maturity time of bonds. A regular yield curve is upward sloping and shows that longer term bonds have a higher return than short term bonds. This is an indication that the economy is healthy and output growth is eminent.


What is an inverted yield curve?


On the contrary there are times when the curve has a downward kink or is inverted. This occurs when the yield or interest rate payable on short term bonds are greater than those offered for long term bonds, such is the situation occurring now mainly in the US. Time is money and money tied up for longer time is supposed to attract a higher return but this is not so at the moment. Currently, the yield on two year bonds are greater than the yield on 10 year bonds. This signals that investors are sceptical about the short term and output might contract. Throughout history, every time the yield curve inverts a recession follows after. This was the case when the yield curve inverted in 2006, 2007 prior to the global financial crisis of 2008. The world is frantic that history might repeat itself and a recession is looming.


It is global?


Along with the trade war between the United States and China, many other countries face severe challenges that might have a negative impact on their gross domestic output in 2020. Germany a key exporter from Europe is witnessing a decline in global demand for their industrial machinery and automobiles. Their GDP fell by 0.1 per cent in the second quarter of 2019. The UK is faced with the Brexit dilemma and change in Prime Minister, their GDP fell by 0.2 per cent in the second quarter of this year. Albeit a reduction in unemployment and increasing real wages should cushion growth against a no deal Brexit in October of 2019. Spain and Italy are also plagued with political issues that might have negative impact on output performance in these countries. Singapore, Brazil, Argentina and other countries might also be negatively affected by the trade war.


Will Jamaica be affected?


Like the global financial crisis of 2008, thelooming recession is predicted to be a large economy phenomenon. These economies have dominated global output. In any natural business cycle after a peak there must be a trough where to some extent demand saturates for different reasons. Developing states like Jamaica are far from frontier and therefore have leverage to continue increasing output. Furthermore the fall in stock prices witnessed in the US associated the inverted yield curve is not witnessed in Jamaica. The local stock markets appear to be robust as companies continue to perform above average. Although to be honest sometimes I wonder if some the increase in the value of some stocks on the market are real.


How can Jamaica protect itself from these global occurrences?


Many of these small developing economies are dependent on economic activity in larger economies. For example Jamaica is dependent on tourism, remittances and bauxite sales, all of which are dependent positive economic activity in developed countries, these are more likely to be negatively affected. In the future more effort has to be more robust we need to tap into different industries where demand is inelastic for example health and wellness, technology and art and culture.


- Dr Andre Haughton is a university lecturer and Opposition senator