A negative economic outlook portends possible business risks
Just a year on from economists' almost unanimous agreement that the global economy was in robust shape, the outlook in 2019 has essentially shifted 180 degrees to that of pessimism. Reflecting this change, the IMF has cut its 2019 growth forecast from 3.7% to 3.5%.
There is perhaps no better demonstration of this rapid about face than the mood at the annual World Economic Forum in Davos, Switzerland. 2018's event was underscored by a resoundingly positive global economic forecast; fast-forward to 2019 and it is instead a collective theme of worry and caution as to where the global economy is headed.
In this article you will learn:
What is driving economists' fear over the global economy
If a recession is inevitable and reasons for optimism
How it may affect companies and how to prepare
Are we already in a recession?
Recessions are typically defined as a period of economic decline that is primarily determined by at least two successive quarters of declining GDP. By this definition, we are not in a recession. However, many economists do see one potentially forming, although it is unlikely to happen until 2020 or later. Others, however, think that a China-led global economic slowdown may prolong, but that it will not plunge to recessionary levels.
A Chinese slowdown and populist trends are dragging down growth
The U.S.-China trade war has caused great concern across the globe. The stand-off between the world's two largest economies has seen the U.S. apply tariffs on USD 250 billion in Chinese goods, and China retaliating with its own tariffs on USD 110 billion in U.S. goods. However, while damaging for global growth, economists are at pains to point out that regardless of this trade war, China's slowing economy would already have been sufficient to cause a ripple effect around the world.
Additionally, other developments have shaken the global outlook. U.S. tariffs on Turkey precipitated the lira's massive devaluation in 2018. Brexit instability, with rising prospects of a no-deal scenario with the European Union, as well as a looming recession for Germany and indeed the wider eurozone, have fueled the likelihood of a recessionary contagion gripping the globe once again.
Regarding the U.S., numerous economists predict a downturn in 2019, and a likely recession in 2020. Should this occur, given the global economy's continued reliance on U.S. consumption, a worldwide recession is likely to ensue.
It's not all doom and gloom: developments this year can bring optimism
Citi has predicted that the continuing U.S.-China trade war could be suspended in a surprise 2019 move. Given the current truce between the two nations and domestic economic pressures weighing on the Trump administration, this scenario is increasingly plausible. While under pressure, the U.S. economy is, however, posting strong performance in areas such as job creation and consumer spending.
On the other side of the Atlantic, while talk of a “no-deal" Brexit continues to dominate the new, the reality is that it remains an unlikely scenario, given the monumental damage that it would cause to both the U.K. and eurozone economies. Moreover, the chances of a second Brexit referendum are increasing.
Moving onto China, some economists are keen to underline that the current slowdown requires a change in how the world is interpreting it. Rather than purely poor economic performance, China has reached the inevitable point where it must transition to a consumption-driven economy. With such a shift, teething problems are inevitable. So rather than a conventional economic downturn, China's slowdown is due to a development that was always going to occur at some point as long as China kept growing.
Businesses can limit risk exposures
On the back of a volatile 2018 for currency markets, global companies can prepare for a possible looming recession in 2019 by planning for a range of scenarios. Without contingency planning in place, it will be difficult to act quickly and effectively should a recession take hold.
Identifying risk exposure levels across the company as well as drawing up a comprehensive management strategy for execution is advised. Limiting emerging market risk in particular is crucial, although the importance of keeping a close eye on risk areas developing closer to home cannot be overstated.
Nothing is certain but preparation is key
Just like 2018's optimism giving way to 2019's pessimism, economists could once again be proven wrong. However, there are numerous compelling reasons for a bearish outlook. While there are some reasons for optimism, businesses can take a “hope for the best but expect the worst" approach. After all, a recession equates to considerable, if not existential, risk for any global business.
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