“Storm clouds are building” and “history suggests that an economic downturn lurks somewhere over the horizon”, the deputy head of the International Monetary Fund warned this week.
There is also growing chatter in financial markets of an impending US recession.
So what is causing all this pessimism? And how concerned should we really all be?
What did the IMF say?
Speaking in London, Christine Lagarde’s deputy, David Lipton, suggested national governments and policymakers had not done enough to “fix the roof” of the financial system over the past two years of relatively benign conditions in the global economy.
“I see storm clouds building, and fear the work on crisis prevention is incomplete,” he said at a conference hosted by Bloomberg.
Lipton also warned if there was another global downturn many governments could struggle to support their economies through cutting taxes and cranking up spending because their sovereign debt burdens are large, thanks to the borrowing accumulated during the crisis a decade ago.
Further, he cautioned that central banks could also struggle to cut interest rates to stimulate because in many countries borrowing rates are still extremely low.
“Central banks would likely end up exploring ever-more unconventional measures. But with their effectiveness uncertain, we ought to be concerned about the potency of monetary policy,” he said.
What’s going on in financial markets?
Traders are talking about an “inverted yield curve” in US government bonds, which some insist is a harbinger of recession. We are close to seeing such an inversion happen.
Major economic downturns in the US, but also in other advanced economies, have usually been preceded by this economic indicator.
A recession in the US, the planet’s biggest economy, would inevitably hit the rest of the world, including the UK hard.
Are there any other warnings?
Yes. Douglas Diamond, the respected US financial economist, has warned that credit has been advanced too liberally to the American corporate sector in recent years and that “the seeds” of a new financial crisis are being planted.
And Sir John Vickers, who led the post-crisis financial reform drive for the UK government, has warned that UK banks are still not safe enough, despite the many assurances from the Bank of England that they are adequately capitalised to withstand even a severe new crisis.
Gordon Brown, the former prime minister, also recently warned that we are in danger of “sleepwalking” into a new financial crisis and warned that the world might be unable to coordinate a response as it did a decade ago.
“The cooperation that was seen in 2008 would not be possible in a post-2018 crisis both in terms of central banks and governments working together. We would have a blame-sharing exercise rather than solving the problem,” he said.
So how worried should we be?
We should be wary, but not panicking.
The US yield curve is not a failsafe predictor of recession. And there are various technical reasons why it may be distorted at the moment.
Yet the voices arguing that the global financial system is not yet safe, despite official assurances, are credible and should be heeded regardless of whether or not we are about to enter a new global recession.
In terms of countries having no fiscal and monetary space to fight a new global downturn, we should not succumb to defeatism.
Laurence Boone, the chief economist of the OECD, wrote this week that, despite the large debt burden from the financial crisis, there was still scope for governments to stimulate through fiscal policy if they acted in coordination with each other.
“Policymakers can and need to start preparing now,” she said.
Perhaps the biggest reason for fear is the analysis from Gordon Brown.
In this era of populist nationalism and fraying multilateralism, what hope is there that governments would park their disagreements and cooperate in the face of another global recession?
That’s a question to which we simply don’t know the answer.
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