A world recession is on the horizon – but trade wars aren’t entirely to blame

The R-word, recession, is stalking the land. This is not a British thing, or a European or American one – or a Chinese or Indian threat. It is a global one. It is the question confronting finance ministers and central bankers as they gather in Washington this coming week for the annual meetings of the International Monetary Fund (IMF) and World Bank. It is the top story on financial publications: is the global economy sliding into the first recession since 2019?

And it is, or should be, the prime issue for anyone interested in the worlds of business, finance or economics.

So what do we know? Well, on Tuesday, the IMF produces its next World Economic Outlook, its twice-a-year overview of what is happening to the world economy and its forecasts for the coming year. It is most likely to cut its previous projection for 2019 from 3.2 per cent to below 3 per cent, the slowest growth since 2009. As for next year, it was predicting a pick-up. We’ll see about that. The IMF has been over-optimistic in the past, and while the emerging world taken as a whole is likely to continue growing, large swathes of the developed world may not. Germany is probably already in recession right now.

Why a recession? The conventional view is that it is the fault of the trade war between the US and China. Investors perked up a bit on Friday when news came through that there was some sort of deal between the world’s two largest economies. The possibility of an agreement between the UK and Europe also helped a bit. Earlier this month, the new managing director of the IMF, Kristalina Georgieva, warned of a synchronised slowdown and she is right to do so. Trade conflicts could mean a reduction in global GDP of 0.8 per cent next year, she said.

There is nothing wrong with conventional economic analysis. Indeed, it is the best place to start thinking about what might happen. But economists have been known to get things wrong, and we don’t really fully understand what drives the business cycle. We know there is a cycle, and we know that downturns seem to happen every seven to 10 years. But each one is different, both as to causes and severity. We know there is some sort of slowdown, so what might turn the slowdown into something worse?

I have two main worries. One is the impact of the ultra-easy money policies of the past few years. The other is a more general lack of confidence about the future across the developed world.

An awful lot has been written about the first: the limits of monetary policy to stimulate economies, the damage done by zero (or negative) interest rates, the impact on wealth inequality, and so on. I’m not sure there is much to add on this, except to note opposition to the European Central Bank’s latest bout of QE, and its policy of negative interest rates, is mounting even within the ECB staff. Put crudely, if Germany is going into recession when interest rates are already negative, what makes anyone think that making them even more negative is going to help? The problem is lack of overall demand, not the cost of credit.

So the widespread view that monetary policy cannot help much either to forestall a recession, or to help us out of it, makes sense.

There has been less focus on the wider loss of self-confidence in the developed world. There are elements that have been identified and written about a great deal. These include, of course, concern about the environment, the impact of ageing populations on public (and personal) finances, the hollowing-out of middle-income jobs, and so on. But it is hard to pull all these together and relate them to what might happen in the next stage of the business cycle.

What we can say, though, is this. If there is a serious downturn, governments will loosen fiscal policy, in particular, borrowing to fund improved infrastructure, and that will have some impact. They will also make sure that there isn’t a financial meltdown on the scale of 2008-09 – they won’t make that mistake again. In addition, technology will continue to march forward, and it has since the Industrial Revolution more than 200 years ago. And crucially, growth in the emerging world will continue reasonably strongly.

Taken together, all these forces will, I think, come together to ensure that if there is a global recession it will not be a particularly serious one. But we have to accept too that the recovery may be slow to get moving, because confidence will return slowly. If people aren’t confident they won’t buy so much. If businesses lack confidence they won’t invest so much. Sadly, and for all sorts of reasons, there is not a lot of confidence about.