There was a hypothesis that the global economy is likely to witness an economic meltdown in 2019. With 2019 just about to get over, there is speculation of the current global slowdown to result in an economic recession in 2020.
The reasons behind the possibility of a recession have been the weakening European economy along with the trade war which has induced uncertainty regarding trade policies. A consequence of this has been reduction in fresh investments by many export-oriented economies and in general, a slow expansion in global trade.
The uncertainty around Brexit further compounded the problem in Europe as many were not sure of UK’s relationship with the European Union.
It is safe to argue that political economy has been a key factor behind the current economic slowdown and therefore, we must look at political developments to see the likely impact on global economy.
The fact that UK elections resulted in a majority government is a positive sign as it ensures that a decisive leadership would be able to reduce uncertainty regarding the Brexit.
With Conservatives winning the election, it is almost certain that Brexit will be a reality. More importantly, the majority will ensure a deal is finalised before Brexit and therefore, a no-deal Brexit as feared by many, is unlikely to happen. As is the case, there is a fair idea of what a Brexit deal would look like and therefore, it is only a matter of time before it finally happens.
The outcome of UK elections also has an important economic implication for India and its trade ties with the UK. Very likely, we are looking at a deeper engagement with the UK on strategic and economic issues which would imply that an India-UK trade deal may soon be a reality.
British Prime Minister, Boris Johnson, had already indicated his desire for such a deal to be signed soon and a fresh sense of urgency regarding it would be beneficial for both the countries.
The other interesting development last week was with a halt to US-China trade war and there being some agreement with regards to what a future trade deal may look like.
Many have termed the agreement between both these countries to be the first phase of a trade deal. Two large economies such as US and China coming together to reduce uncertainty is likely to send a signal that perhaps, the worst of the trade war is over.
This reduced uncertainty ensures that a predictable global trade regime is likely to appear at the end of the road and it would possibly be visible towards the end of 2020. However, if an economic recession was to be caused because of trade war-induced uncertainties, then it is unlikely to hit us in 2020.
The vulnerability for an economic recession comes primarily from the equity markets, which continue to attain newer heights. This suggests that somehow equity markets at present don’t anticipate an economic recession — however, markets have often failed to predict the future towards a turn.
Indeed, the hope is that earnings will catch up to justify the current level of prices.
However, economic growth depends on multiple factors and therefore, it was too simplistic to presume a recession because of a trade war, just as it is too simplistic to assume that the lack of it would result in improved earnings.
Growth outlook for the next financial year may be better for the world compared to the current financial year. However, we must continuously look out for fresh vulnerabilities and try to fine tune our policy responses in time.
Luckily, leading central bankers are keenly looking at these developments and therefore, there is hope that a prophecy for another recession towards the end of the year is just another prophecy that fails to see the light of day.
As they say that a perennial pessimist factors in a recession every year, they know that they would eventually be right, at some point in time. A perennial optimist is likely to expect normal growth every year, for they know that they would be right except for a few times.