A Looming Global Recession?

While the Myanmar economy’s expected growth rate of 6.6% in 2020, as projected by the latest World Bank report, has made headlines and infused new enthusiasm, other countries seem to be facing an imminent recession, casting a global pall of gloom. Predominant in other countries across the globe, is the current slowdown in manufacturing, in growth rates, slack investments, reduced profits and weakening trade. The IMF has also declared that 90% of the economies are witnessing a ‘downshift in growth’, while projecting a 3% expansion of the global economy.

Are these just stories and ideas going viral, as stated by Nobel winning economist, Robert Shiller in his book, Narrative Economics? He has propagated a theory that a lot of consumer behavior and business decisions are taken on the basis of hearsay, news, social media updates and accordingly people decide how and where to invest, to save less or more, to expand businesses or wait.  Shiller calls these “narratives” contagious, and could well lead an economy towards recession, since people will act with that belief and reinforce the story that’s circulating.

Evidently, recession is much more than just a narrative effect. There are disturbing indicators, statistics revealing an economic slowdown and political decisions triggering skepticism and uncertainty. When economies are buoyant, one witnesses a wave of optimism, robust growth and stability in prices of precious metals and currencies.

What is a Recession

Economic activities go through cyclical phases of expansion and contraction, often due to structural changes that are implemented. Growth also takes place in phases and in-between there are periods of slowdowns, when manufacturing reduces, unemployment increases, wholesale and retail trade declines, consumer spending contracts, all of these leading to a decline in growth rates or a deceleration. The ensuing economic pain often has long lasting impacts.

A recession is a phase of temporary economic decline with reduced trade and subdued economic activity. Recessions are not always avoidable but their damage can be minimized by corrective government actions and revision of monetary, fiscal and trade policies that can give an impetus to increase business activity. This helps because a long-lasting recession threatens to lead to a ‘depression’ which is much worse.

Stories and narratives about a recession abound and continue to dominate government actions, to prevent lasting damage. Economists and business professionals are all commenting about it. The new IMF Chief, Kristina Georgieva said that the global economy is facing a “synchronized slowdown’. Jamie Dimon, the Chief Executive of JP Morgan Chase, said that “a recession may be on the horizon, due to continuing tensions with China”. This conflict while leading to reduced business confidence, hiring, and cutback on business capital expenditure, has not yet reduced consumer spending. In a similar tone, Chief Economist of Moody’s Analytics, Mark Zandi, says there are ‘awfully high’ risks of a global recession in the next 12-18 months.

A recession is officially recognized as one, when there is a decline in GDP for two consecutive quarters, or six months, besides drops in income, output, sales and employment. If these are of a cyclical nature then it is only a question of time when the upswing will be noticed again, provided no drastic measures are taken. If, however, these declines are of a structural nature, then a lot of carefully conceived steps have to be taken to prevent further decline, and such recessions can be of a shorter duration.

Often, a recession has already set in, before it is noticed.

Gold prices surge

 The upward trend of gold prices was one of the early indicators, with the metal reacting sharply to the economic changes taking place, especially in the European Union. In the past, gold prices have soared each time recessionary tendencies have been witnessed, and people switch to investment in gold as a safe haven. Signs of a slowdown in the US pushed gold prices further up even as the US dollar fell.

Gold prices have scaled new heights often during the festive season in Asian countries like India, but this time the rise has been for other reasons, as weak data was published from the Eurozone, bond yields expected to fall, and also the Saudi oil crisis.

While gold is merely a store of value with an intrinsic value of its own, yielding no return for investing in it, it remains a safe asset that sees a surge in demand when yields from bonds decline.  In September 2019, gold prices had touched a six-year high.

There is a negative correlation between gold prices and stocks. High stock prices indicate growth and economic stability, while high gold prices are indicative of economic distress and potential crisis.

While presently Myanmar seems unaffected by any recessionary trends, gold prices have been rising here too, and despite this increase, gold demand had doubled in the month of September, most of it for gold bars and not ornaments for personal use. Gold prices rose from MMK 1.05 million per tical in April to MMK 1.278 million per tical in the first week of September. 

Inverted yield curve

One of the most consistent, reliable indicators of a recession is an inverted yield curve of the US Treasury bonds. The curve is the spread between the short term and long term dated treasury bonds, turning negative when the yield from short term bonds is higher than the long term ones, typically comparing the 2-year bonds to the 10-year ones.

An inverted US Treasury bond yield curve was seen in August, for the first time since the 2007 crisis, bringing out the first fears of a recession in the world’s strongest economy, which would have a ripple effect.

Since 1950, each of the nine big recessions seen have been preceded by a similar inverted yield curve, being the first indicator of reduced economic activity, since investors begin to invest in bonds when stock prices become more volatile. However, it is also true that all inverted yield curves have not led to recessions, though every recession has been preceded by a visible inversion on the curve.

The curve must be viewed in tandem with other economic indicators like interest rates, stock prices, consumer spending and unemployment rates, to prevent a ‘narrative effect’ from taking place. 

Countries and regions impacted

The United States saw its manufacturing index touch its lowest point in over a decade, causing significant alarm. It does not help to see warehouses piling up, falling orders and lackadaisical demand. The root cause is the trade policies adopted by the current government, leading to a trade war with China, and impacting US trade relations with its NAFTA partner nations, Europe and even Japan. The US dollar has witnessed losses, growth rates have slowed down, and as the US Federal Reserve stated, the economy was weighed down by persistent trade tensions and slower global growth.

The European Union is witnessing problems on many fronts. The Brexit uncertainty has been dragging on, negatively impacting growth and investment in UK, Germany has seen shrinking economic activity with a manufacturing recession, touching its lowest point in the last decade, and Italy facing a technical recession for since mid-2018. Other EU nations have also reported declining growth rates.

Data collected in July revealed that China’s industrial output grew at the slowest pace in 17 years. Added to this is the trade war with the US, which is considered to be the biggest factor responsible for the global slowdown. China’s industrial production has shown the lowest growth rate in three decades, and is facing a debt crisis, with both state-owned businesses and individuals having borrowed heavily.

Japan saw its manufacturing activity shrink at the fastest pace in September, out of the last seven months. The Middle East tensions escalated after the strikes at two Saudi oil fields for which Iran has been blamed. Asian stocks have tumbled. Venezuela despite the largest oil reserves faces an economic and political crisis, Argentina crumbling under its debt burden and Turkey has seen a recession in two out of four quarters of 2018.

There are a few factors that appear to indicate that this is not a full-blown recession, and perhaps just a downturn in economies due to declining manufacturing levels, and trade wars. Consumer spending, often one of the primary indicators of recession, has not reduced substantially, the unemployment rates have not risen even though lesser employment opportunities are seen, and unlike 2008, thousands are not losing jobs. The housing market remains upbeat, even though a slowdown is evident. 

Some economists believe this is a growth recession with economies growing below trend with a conspicuous deceleration. This implies that growth is taking place, albeit at a slower pace.

Is Myanmar cushioned safely?

Myanmar is likely to be impacted by the ASEAN slowdown and the recessionary trends obvious in the economies of its giant neighbors, India and China. The latest government reforms are likely to cushion some of the negative impact, and encourage more foreign investments, which in turn will improve employment opportunities, put more money in the hands of the common man and with this, consumer spending, essential for growth, will then rise.

The distressing US China trade war may open up a great opportunity for Myanmar as a destination for setting up manufacturing units. With its cheap labor and lower costs of production, it can be a win-win situation for both sides. 

Despite the World Bank figures indicating a 6.6% growth rate for Myanmar in 2020, the decline of economic prosperity of the region will manifest here too. The slowdown in the European Union will reduce demand for Myanmar exports, and tourism will be impacted with fewer Europeans coming here as tourists. The slowdown in China is causing trade numbers to fall. According to the Ministry of Commerce, the country’s border trade decreased by USD 1.2 billion in 2018-19. The numbers could be higher in the current fiscal.  

One of the biggest advantages of narratives is that it prepares decision makers for the right moves and gives time to take corrective measures that can stall any decline in growth rates, giving the right impetus to industry, trade and manufacturing, so that the slowdown picks up, rather than sink into a lasting recession.