AFP/Jeff Kowalsky

Warning 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.

Even before US President Donald Trump started a trade war with China, the economic globalization was in retreat. 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.

According to the Center for Economic Policy Research’s Global Trade Alert, since 2008 the world’s major economies have imposed 6,000 barriers to protect themselves from foreign competition. Worse, the Sino-American trade war is already fueling a broader process of deglobalization, because countries and companies can no longer count on the long-term stability of these integrated value chains.

As trade in goods, services, capital, labor, information, data and technology becomes increasingly balkanized, global production costs will rise across all industries, constraining growth across the globe. Since 2009, at the end of the global financial crisis, advanced economies have accumulated huge debt as they were forced to provide fiscal stimulus to ease the pain from deep recession. The world’s debt now stands at a record US$244 trillion, which is more than three times the size of the global economy.

According to the Institute of International Finance, the global debt-to-gross domestic product ratio exceeded 318 percent last year. This is unsustainable, because if there is another economic shock, bankruptcies would spread. As countries are attempting to reign in their debt growth, the process of deleveraging has gotten underway, limiting the space for economic growth.

Demography is another force that can have a long-term impact on global growth. Most industrialized countries are aging fast, where the growth of their population over 65 years of age has outpaced the growth of their working population (aged 15 to 64). This would inflict a heavier fiscal burden as spending on social welfare for the old aged such as retirement payments, health care and other social protections soars.

Ruchir Sharma, an economist at Morgan Stanley, has looked in depth at the link between economic growth and the growth of the working population. He found that since 1960 there were 56 cases where countries whose working age population grew by 2.7 percent enjoyed 10 percent economic growth. In 38 cases, where the working age population shrank, the average economic growth of these countries was a meager 1.5 percent.

Out of these findings he suggested that countries with a working population growth of less than 2 percent would be unable to sustain high growth. This is because working age population plays a great role in demand, consumption and growth.

Because the global economy is facing challenges from the “Four Ds” — disinvestment, deglobalization, deleveraging and demography — the current economic slowdown could slip into a new kind of recession. It would not be a short, or temporary or cyclical recession. This is the same phenomenon that economist Alvin Hansen observed in the 1930s during the great depression.

He termed this situation “secular stagnation”, a situation in which the recession was long, structural and persistent. As in the 1930s the world is now experiencing a huge imbalance between saving and investment, where the propensity to save is increasing and the propensity to invest is decreasing.

The most serious risk is the inability of developed economies to mount an adequate response to these challenges. The space for monetary stimulus has been constrained because current interest rates are too low, and further lowering would penalize savers and depositors. Keynesian-style counter cyclical policies would be hard to introduce because in the high debt and deficit environment, more fiscal stimulus is politically unpopular.

If the current growth slowdown turns into a secular stagnation, the era of high global growth would end. For Indonesia that would be the end of its five-year growth era. That is why the World Bank projection downgrading Indonesia’s economic growth projection to 4.9 percent in 2020 and to 4.6 percent in 2022 should be taken seriously.

The government should take immediate actions to mount an adequate response to this grim outlook. This should be the first thing for President Joko “Jokowi” Widodo to ponder on day one after he is sworn in as president for his second term in October 2019.

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The writer is a commissioner at a publicly listed oil and gas service company. The views expressed are his own.

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