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Recession or secular stagnation?
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As economic growth slows down, more countries have turned to more protectionism by erecting more barriers against goods and services from other countries to save their industries. (Shutterstock/Number1411)
W
arning signs that the global economy is slipping into recession have intensified as growth in major industrial economies continues to weaken.
There are two indicators used by the markets to predict whether an economic recession is imminent. One is the length of the business cycle. Since the global financial crisis of 2008-2009, growth in developed economies has been on a path of recovery, albeit at a slow rate.
The recovery has been running for 10 years in 2019. The business cycle dynamics suggest that after this long period of growth, the economy would slip into recession.
The second indicator that is viewed by the market as a harbinger of recession is the yield on the 10-year United States Treasury bond. The long-term interest rate has dropped to below 2 percent. This is because amid uncertainty, investors would rather buy 10-year US Treasury bonds as a safe haven for their investment.
The result is that the economies of the industrial world suffer from an increasing propensity to save and a decreasing propensity to invest. The excessive saving acts as a drag on demand and reduces growth.
There are other forces that have a long-term influence on the current economic slowdown. The new economy, shaped by digital technology tends to conserve capital. Apple and Google, which are moving to the frontier of technology, find themselves awash with cash, as they do not require huge investment in physical capital.
Amazon and Uber and the spread of e-commerce reduce demand for automobiles, shopping centers, malls and office space. In a period of rapid technological change, it makes sense for businesses to defer investment, lest new technology soon make the old obsolete. The process of disinvestment reduces space for global growth.
