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It's confusing when experts can't agree on economic outlook

07 March 2019

Clearly there’s global angst about a recession.  Word searches for “recession” on Google has soared to the highest level in five years.

Is a recession looming or isn’t it?  If it is, will it be with a capital “R” or a little “r”?

There’s little to be gained in seeking guidance from so called experts.  They can’t agree.  How’s this for a smorgasbord of recent newspaper headlines?  On the one hand we see “Financial downturn signals flashing red”….“Investors are sensing trouble”…but on the other hand, ”APEC investors’ increased interest in Australia”…”Recession fears ‘a bit overdone’: IMF boss”….but then there’s “CEOs’ record jump in pessimism”….as against ”shares tipped to bounce back after poor year”

In this article Macks Advisory will review what some of these experts are saying about the possibility and nature of a global economic downturn in the immediate future.  Also in this newsletter, we’ll consider how our State might fare in this situation and how SA business owners can best be ready to cope with it. See accompanying article headed How would SA fare in an economic downturn?

Some experts’ opinions

Generally, it’s agreed that within about 12 months or so there’ll be a global financial downturn of some kind.  China’s slowing rate of growth, likely to be aggravated by trade tensions, particularly with the US, is a major worry.  As this article was being written President Trump had agreed to resume talks with the Chinese about tariffs, but who knows whether what’s said will make matters better, worse or have no immediate significant effect.

Members of the European Economic Community (EEC) singly and collectively are in financial disarray.  Expert opinion seems equally divided about whether a whatever-Brexit - deal or no deal – would make Europe’s economic prognosis even more dicey than it is now should the prospect of a forecast global downturn be factored into the equation.

The state of many so-called “emerging economies”, which nonetheless account for 59% of global buying power, is a major concern of many economists who note the financial futures of these countries are mortgaged to the hilt with loans they’re already struggling to repay.

Looking at all this, and taking into account “market volatility”, the International Monetary Fund’s (IMF’s) Christine Lagarde said as 2018 came to an end, that concerns about a recession were however “a bit overdone”.  She said she didn’t believe there would be an economic contraction in the US in the near term (which would have been a likely precursor to a recession).  Indeed, she forecast global economic growth at 3.7% for this year.

What’s the significance of that opinion?

Ms Lagarde however, has changed her mind in recent weeks, downgrading her forecast for the growth rate of the world’s economy in 2019 from 3.7% to 3.3%.  She apparently believes that although talk of a recession had previously been somewhat overdone, it is now being less overdone.

Should SA business owners assume that this means the IMF, in a time span of only a couple of months, considers the likelihood of a global financial downturn has increased?  Irrespective of what they assume, what value should they put on Ms Lagarde’s change of heart?

Not a lot, is Macks Advisory’s opinion – and this is in no way an implied criticism of Ms Lagarde or the IMF. In our view her predicted drop of 0.4% in global economic growth this year (from her earlier prediction of 3.7%) whether right or wrong, is of very little, if any, significance.

Here’s why. Based on information from 22,500 sources, The Statistics Portal shows global economic growth from 2012 to 2018 averaged 3.55%.  If its forecasts for each of the years 2019 to 2022 are correct and are included in the calculation, then global economic growth from 2012 to 2022 will have averaged 3.57%.

Furthermore, in 2005, the year before the world began spiraling into the GFC, the rate of economic growth was actually 3.83%, and by 2007 it was 4.23%.

So, wherein lies any significance?

While economists and business analysts differ about the extent and severity of an imminent global economic downturn, most accept one is likely, and none that we’re aware of says a downturn is out of the question.

In January, World Economic Forum was presented with an annual survey of 1300 leading CEOs worldwide - an exercise billed as “a good predictor of economic result”.  It revealed “a record jump in pessimism” about the world economy.

Thirty per cent of CEOs surveyed said they believed global economic growth would decline this year, a six-fold increase in pessimism since last year when 57% of them were optimistic.

Thirty five percent still felt over regulation was the greatest impediment to business growth but “policy uncertainty” - a new metric introduced this year - was a close runner-up.

That would seem significant, rather than merely interesting, when aligned with the most recent Goldman Sachs Index of Global Policy Uncertainty which, at a record high, is triple the 20-year median level.

The challenge facing Australia

Although it suffered less than probably any other country during the GFC, the spectre of the disaster still haunts Australia.  Meagre wage growth, soaring asset prices and deep-rooted anger with financial institutions and banks, sees an unhappy situation exacerbated by a tightening credit squeeze. 

All this has tended to hobble attempts to reform taxation and curb spending in both private and public sectors, so that with the exception of Switzerland, Australians individually continue to be the most indebted people on earth.

Government policy uncertainty in dealing with the nation’s economic challenges is heightened by the politics of the forthcoming election.

Elections this year are also due in Canada, Greece, Finland, Denmark, Poland, Switzerland, Israel, Argentina, South Africa and India where political fringes to the left and right are continuing to gain ground at the expense of parties in the political centre.  But of course that‘s a phenomenon by no means limited to countries facing immediate elections.

Undoubtedly Australian businesses’ angst about domestic policy uncertainty is being intensified by global policy uncertainty, yet if the Reserve Bank of Australia (RBA) is to be believed, they should have no worries at all about any sort of economic downturn in the immediate future.

It has forecast a period of prosperity with rapid economic growth lasting at least until the end of 2020, and this, just weeks before The Advertiser’s mid January report that SA’s jobs growth had dropped by a third in the past 12 months.

Confused as they must be by an array of conflicting opinions from respected authorities on global and domestic economies, SA business owners face testing times.

Disclaimer: The information contained in this webpage is general information and does not constitute legal advice. Nothing in this webpage is or purports to be advice. If you do need advice, then you ought to seek and obtain appropriate personal professional advice based on your personal circumstance.

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