Tuesday, June 04, 2019

11 years after the global financial crisis took place, the global economy is once again experiencing an overall slowdown. The problems faced by the global economy are mostly brought on by man-made causes. The financial crisis in 2008 was caused by a problem in the financial system, yet the current global crisis we are facing now is to a considerable extent, a "man-made disaster" caused by extreme policies. One of the most obvious examples is the global trade war initiated by the Trump administration.

Taking a step back to look at the bigger picture, the cause of the trade war is related to the problems faced by globalization. However, regardless of how intense the trade war turns out to be, it would be difficult to reverse and completely subvert the general trend of globalization. Therefore, the Trump administration's insistence on a trade war has inflicted great damage upon the global economic system. The trade war is not only happening between the United States and China, the two largest economies in the world. The United States also extended its trade battles to Europe, Japan, Mexico, India and other countries. This all-rounded assault strategy is not only not helpful to the United States, but also drags down the global economy.

Many investment bank economists have begun to issue warnings the global economy. Chetan Ahya, chief economist at Morgan Stanley, warned that if the U.S.-China trade disputes further escalate, "we could end up in a recession in three quarters". According to Ahya, "investors are generally of the view that the trade dispute could drag on for longer, but they appear to be overlooking its potential impact on the global macro outlook". These would include the increase in tariffs, which will lead to increased costs, slower consumer demand, and corporate cuts in capital expenditures, and all these factors will affect economic activity. The global economy may fall into recession as soon as nine months later. He urged investors not to underestimate the impact of the escalation of trade war on the global economic cycle.

Goldman Sachs lowered the U.S. economic growth forecast for the second half of the year from 2.5% to 2%. It is expected that the Federal Reserve will not be able to refuse cutting interest rates. Goldman Sachs noted that there is now a 60% chance of the U.S. placing a new 10% tariff on the final $300 billion of Chinese imports, instead of the earlier 40% chance. In addition, there are also more than a 50% chance of the States imposing 10% of tariffs on all Mexican products. The resulting possibilities are that the U.S. economy will slow down to 2% in the second half of the year, and the chances of the Fed's interest rate cuts will increase.

Economists at JPMorgan Chase also expect that the chances of the U.S. economy entering the recession in the second half of this year will increase sharply from a 25% chance a month ago to 40% now, and the global economy will be significantly more sluggish in the long-term trend during the second half of the year.

The Fed's internal concerns about the economic slowdown are also increasing. St. Louis Federal Reserve Bank President James Bullard said that the uncertainty of global trade is likely to slow down the economic growth beyond the expectations. He cited the inverted yield curve reflects the current high policy interest rates, and that the Fed may soon have reason to cut the rates. Fed Chairman Jerome Powell's latest speech on June 4 made it clear that the Fed will take appropriate measures to maintain a sustained economic expansion. He stated that, "we do not know how or when these (trade) issues will be resolved … we will act as appropriate to sustain the (economic) expansion".

The strong stance of the Fed chairman immediately stimulated a rise in the capital market, but whether this short-term upswing can continue is questionable, as policy stimulus will not be able to bring changes in economic fundamentals. As Morgan Stanley warned, the damage of the trade war on the economy is pervasive. Even if central banks around the world stimulate the economy with loose monetary policies, it will cause trade activities to take time in order to rebound due to the lagging effects of the loose monetary policy. Hence, the warning of a global recession is not something that is being exaggerated.

The impact of the trade war as felt by entrepreneurs is different from that felt by economists, but its conclusions are the same. Hon Hai Group's chairman Terry Guo warned that the world's economy will change dramatically in a matter of months or weeks, and that a "tsunami" bigger than the financial crisis is brewing. Guo learned that many SMEs in the global industrial chain have reported that they are not getting orders. The seriousness of this problem has exceeded everyone's expectations. He bluntly said that if the United States and China do not cease the disputes, the impact in the future will be unimaginable. He also warned that it is not only the manufacturing industry that is affected, as stock prices, the exchange rate, SMEs and even the future consumer economy will be greatly impacted. Gou revealed that he made a lot of calls to Hon Hai's customers and suppliers in the United States and Japan, as well as to economists and financial scientists, and everyone shares the same pessimism about the current economy.

Final analysis conclusion:

Dynamically tracking the progress of the trade war and the changes in the global economy will show that the dark clouds of an impending global economic recession are becoming denser. If the trade war between China and the United States does not stop urgently, and if the agreement is not reached through negotiations, the outlook for the global economy will be quite pessimistic. In case that there is any destructive intervention, there would be a bigger possibility for the world economy to face a synchronized recession.

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