NEW HAVEN, Connecticut: Only now are we becoming aware of the danger the global economy narrowly avoided in 2019.
According to the International Monetary Funds preliminary, world GDP grew by just 2.9 per cent last year – the weakest performance since the outright contraction in the depths of the global financial crisis in 2009 and far short of the 3.8 per cent pace of post-crisis recovery over the 2010 to 2018 period.
On the surface, 2.9 per cent global growth doesnt appear too shabby. But 40 years of perspective says otherwise. Since 1980, trend world GDP growth has averaged 3.5 per cent.
For any economy, including the world as a whole, the key to assessing growth implications can be found in deviations from the trend – a proxy for the so-called output gap.
Last years shortfall from trend (0.6 percentage points) brought growth uncomfortably close to the widely accepted global recession threshold of approximately 2.5 per cent.
Unlike individual economies, which normally contract in an outright recession, that is rarely the case for the world as a whole.
We know from the IMFs extensive coverage of the world economy, which consists of a broad cross-section of some 194 countries, that in a global recession about half of the worlds economies are typically contracting, while the other half are still expanding – albeit at a subdued pace.
The global recession of a decade ago was a notable exception: By early 2009, fully three-quarters of the worlds economies were actually shrinking.
That tipped the scales to a rare outright contraction in world GDP, the first such downturn in the overall global economy since the 1930s.
THE DANGER ZONE
For global business-cycle analysts, this 2.5 to 3.5 per cent growth band is considered the danger zone.
When world output growth slips to the lower half of that range – as it did in 2019 – the risks of global recession need to be taken seriously.
As is typically the case for official, or institutional, forecasts, the IMF is projecting a modest acceleration of annual world GDP growth in 2020 and 2021, to 3.3 per cent and 3.4 per cent, respectively.
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But as the physicist Niels Bohr once said, “Prediction is very difficult, especially if it is about the future.”
Just ask the IMF, which has revised down six consecutive iterations of its global forecast. Obviously, there is no guarantee that its latest optimistic projection will be realized.
WORSENED BY DOWNSIDE RISKS
Downside risks are especially worrisome, because a 2.9 per cent growth outcome for the world economy underscores the lack of a comfortable cushion in the event of a shock.
As I noted recently, predicting shocks is a fools game. Yet the tough measures that China is now taking to contain the lethal Wuhan coronavirus only serve to remind us that shocks are far more frequent than we care to think.
A few weeks ago, it was the possibility of a hot war between the United States and Iran. And before that, there was the increasingly contentious US-China trade war.
The point is that below-trend global growth, especially when it moves into the lower half of the 2.5 to 3.5 per cent range, is nearing its stall speed.
That leaves the world much more susceptible to recession than it would otherwise be in a more vigorous environment of above-trend global growth.
GLOBAL TRADE HAS ALSO WEAKENED
The same message comes through loud and clear in gauging the risks to the global trade cycle – long the major engine of global growth in an increasingly integrated, supply-chain-linked world economy.
The IMFs latest assessment put global trade growth at just 1 per cent in 2019 – its seventh consecutive downward revision. Indeed, last year was the weakest trade performance since the historic 10.4 per cent plunge in 2009, which was the worst contraction since the early 1930s.
Compared to the 5 per cent average over the 2010 to 2018 period, the slowdown of world trade growth to just 1 per cent in 2019 is all the more alarming.
In fact, it was the fourth-weakest year since 1980, and the three worse years – 1982, 2001, and 2009 – were all associated with global recessions.
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Global trade growth has never recovered to its pre-crisis pace, a sRead More – Source