Half way into 2016, there have been evident indications of a possible global recession. Gross domestic product growth rates have been on the decline in many countries, stock prices have been reducing for an extended period of times, youth unemployment has been on the rise, and both investment and consumption have declined in many nations. Does this mean the world is facing another financial crisis such as the sub-prime mortgage loan in 2008, or are the pundits overreacting to something that in reality has little effect on the global economy in the long run?
This year did not start off well for the world economy. Plagued by low oil prices, political scandal, and a decrease in consumer confidence, the economy generated worries that a second 2008 crisis might occur. The International Monetary Fund (IMF) responded to such negativity by reducing the expected global economic growth rate from 3.3 percent to 2.9 percent.
The Chinese economy, the world's second largest, saw its target growth rate reduced by 0.5 percent. Some experts predict that the American economy has a 20 percent chance to fall into a recession this year. The major Latin American economies have been slowing as well. Most of all, the predictions given by the IMF, which stated that, “a modest recovery is expected for advanced countries and a gradual improvement of growth rates in countries in economic distress, in the beginning of the year, seems to be way off track. What's behind the world's economic problems?
Dragging GDP Growth Rate
America’s economy has probably the greatest influence on the global economy. And at this time, it is not good. America is, on the surface, supposed to be enjoying further growth with cheaper oil prices and low unemployment. However, America’s gross domestic product (GDP) growth rate has been on the decline since the end of last year and as recently hit an annual rate of 0.5 percent, its lowest rate since January 2014.
In Asia, things have not been good for China lately. After enjoying very high economic growth rates for several years, its growth rate is now the lowest it has been since 1997. Although its GDP growth rate is still relatively impressive at 6.7 percent, China's super growth is slowly starting to fade into history.
Besides China, other economic powers in Asia have been struggling. The Organization for Economic Co-operation and Development (OECD), for example recently reduced South Korea’s GDP growth rate down to 2.7 percent from 3.1 percent. Also Japan, who has seen its economy shrink by approximately 1.4 percent last year, has a GDP growth rate of only 0.5 percent. To make things worse, according to The Guardian, things might get worse for Japan since “the negative interest rate policy have failed to produce wanted effects.”
Latin American economies continue to slow, and growth is down 1.4 percent on average when compared to last year. Some of the major economies of the continent, such as Brazil, Mexico and Venezuela have all be hit hard.
Although the European Union (EU) nations currently show a stable economic growth rate of 1.6 percent, Europe as a whole was suffering from plagued economy. When looking at Europe as a whole, Professor Dirk Bethmann (Economics) said, “America is doing better than Europe is.” He claimed that Europe’s economic performance needed deeper analysis because the continent is so diverse. “It is more problematic as you go south in Europe, and even the countries in the northern region are not experiencing booming economies.”
Same Phenomenon, Different Reasons
America’s economic slowdown was somewhat unexpected. Despite the advantage of low oil prices, America’s economic growth rate has not accelerated. CNBC expertspoint out that the main problem was decreased consumer confidence. Since 70 percent of America’s GDP is comprised of consumer spending, that's an important factor.
▲ Decreasing American GDP growth rate. Similar trends are found elsewhere globally. Provided by tradingeconomics.com.
“Consumers tend to spend less and save more when they feel uncertain,” said Professor Bethmann. He hypothesized that such spending patterns are correlated to labor market situations and the current global economic trend, which he defined as uncertain. He also added, “It is difficult to know where such lack of consumer confidence comes from,” but the consequences of consumers spending less are fairly evident.
Such a lack of consumer confidence has had an unwanted effect on China’s economy as well. With some of the biggest consumers hesitant to consume, China, the biggest producer in the world, have failed to balance their supply and the global demand of their products. Therefore, China is expected to lay off more than 180,000 workers from its manufacturing sector, which has had a direct influence on the overall economy of the country.
Professor Bethmann partially blamed such poor performance on overinvestment and also said that China was doing poorly because “the global economic is uncertain, restraining consumers from spending.” Due to the lack of consumer confidence, especially in the United States (U.S.), the biggest spender, China, the biggest producer, is struggling to find consumers to sell their products to.
▲ A decrease in energy and commodity prices including oil. Such decrease in the price hasbrought down the GDP of Latin American nations. Provided by imf.org.
Although lower prices of oils and raw materials benefited several countries, including the U.S., nations such as Mexico, Venezuela, and Colombia which are highly reliant on the sales of raw commodities and oil saw their economies decline along with commodity prices. Such trend was already found early in 2015, but the situation only worsened as the natural energy and oil prices kept decreasing.
However, Professor Bethmann claimed that the economic recession in Latin American countries was mostly related to politics. “Consumers may also feel uncertain when the current status of the nation is unstable,” he said, and the current political scandal in Brazil and other social issues in Mexico epitomize this.
Europe is also a victim of diminishing consumer confidences since, according to The Economist, the underperformance in European stocks and equity markets have hurt consumer and business confidence. Professor Bethmann also blamed the refugee crisis for Europe's struggles. The influx of refugees and resulting unexpected large scale expenditures and loss of low-skilled jobs have created much uncertainty within Europe that makes consumers more hesitant to spend.
▲ A graph of the economic growth rate among EU nations. The seemingly high economic growth rate makes it look as if the Europe is doing well economically when in reality, it is doingworse than America. Photo provided by tradingeconomics.com.
Anticipating the Future
Now that the world economy is on shaky ground, consumers are waiting to open their wallets. Mostly relying on the most news and economic experts’ anticipations how the economy will perform in the near future, consumers most desperately wait for any further notices from economic experts to alert the situation they are in.
However, it may be more reasonable to not solely rely on what is being said throughout the media. It is true that those who predict the future economy specialize within that field only, but the world economy is a topic full of uncertainties. Both Professor Bethmann and Lee Jong Hwa (Economics) claimed that, “It is really difficult to make any predictions about the future, since we need to gather a lot of information to do so.
Professor Bethmann also added, “All predictions are displayed as point estimates when in reality, the predictions come out in confidence intervals.” In other words, when professional economists present their numerical figure that is supposed to represent the future economy, these numerical figures are actually just one of the numbers between a range of numbers. This range may be very wide when the economy is difficult to predict precisely. However, consumers generally look for a single numerical figure which may falsely represent what is to come in the future.
In the midst of uncertainty, Professor Bethmann did concede that although the global economy is far from rosy, there is no sign of another economic crisis the world experienced in 2008. But he again stated that no one knows what the future might bring.
▲ Speculated global economic growth and the actual growth rate. The frequent deviationsshow how most speculations are off-track. Provided by disruptiveinvestor.com.
Looking for a Way Out
How can nation overcome economic difficulties and maintain their economic growth in the long run? Different nations function under different economies, therefore each region has different ways of dealing with sluggish economies. According to an article written by Professor Lee Jong Hwa (Economics and published in Project Syndicate, “Countries must strengthen their resilience against adverse external shocks, including through efforts to strengthen their own financial systems.”
Professor Lee Jong Hwa (Economics) wrote that emerging economies which are heavily reliant on exports, such as Latin American nations, should “look for other sources of growth such as investment in public infrastructure, improved investment climate, and social safety nets.” This is especially relevant to Venezuela and Mexico, whose economies fluctuate depending on the world price of commodities, implying that they should build other economic safety nets to buffer significant decreases in commodity prices.
Professor Lee also addressed structural bottlenecks which are defined by Investopedia: “A congestion in a system that occurs when workloads arrive at a given point more quickly than that point can handle them.” In his article, he wrote that several reforms should take place to “promote competition in product markets and to increase the flexibility by lowering barriers to market entry, supporting business operations, and increasing access to finance.”
Non-economic problems such as corruption should be eradicated, Professor Lee wrote. “Corruption is pervasive in many emerging economies, hindering sustained growth.” Corruption can take many forms. For example, the drug cartels in Mexico have created an unstable environment that deters outside investment and economic opportunities. Therefore, non-economic issues that have direct effects on a nation’s economy should be addressed.
Professor Bethmann finally comment that, “All nations are interconnected in some ways, and their economies are influenced by the performances of the others.” Although nations have their own problems to solve in order to end the vicious cycle of recession, the future of the global economy will depend on how well nations cooperate with each other.
▲ A picture of a recession and a worried businessman. Provided by thefourthrevolution.org.