Page 14 - Forbes - Asia (December 2019 - January 2020)

ECONOMICS MATTERS
Recession by Stealth
enerals are always
fighting the last war.
It’s not that different
Gwhen it comes to
fighting economic downturns.
Since the global financial crisis a
decade ago, we have been scour-
ing the horizon for any signs of
financial fragility, such as asset
bubbles, that could plunge us into
the next global recession. Despite mounting evidence of a
weakening economy, there are no asset bubbles comparable
to that of the pre-2008 period. And we won’t find any, even
as we edge closer to the next recession. Since the last global
financial crisis, the global economy has been reshaped by
different forces, and the coming recession will be caused by
factors totally different from those of the last one.
First off, the global economy today is mired in uncertain-
ty arising from the trade war, an enfeebled Europe, Brexit
and rising geopolitical tensions. An even deeper source of
uncertainty is that the liberal global economic order, in place
since the 1950s, is dying. Two trends are converging to kill it.
Yuwa Hedrick-Wong is Chief Economics Commentator for Forbes Asia. He is also a visiting scholar at the Lee Kuan Yew School of Public
Policy, National University of Singapore. Having worked as an economist across the Asia-Pacific, Europe, Middle East and Africa in the
past 25 years, he regularly writes columns about the global economy for Forbes Asia. Views expressed are his own and do not necessarily
reflect those of Forbes Asia. Email: yuwa.hedrick.wong@gmail.com.
12 | FORBES ASIA DECEMBER 2019 / JANUARY 2020
YUWA HEDRICK-WONG
The first is the West’s declining economic dominance relative
to the rest of the world, and China in particular. The second
is the rise of populism in Western democracies, arguably the
most serious challenge to the legitimacy of the liberal global
order. And yet, even as the liberal global economic order
fades away, it’s unclear what a post-liberal global economic
order will look like. So for now, the global economy is like
a barfly at closing time: it has no clue where it’s going, but it
can’t stay here.
Developed world economies have meanwhile been se-
riously weakened by prolonged zero interest rates, making
them vulnerable to unexpected shocks. Extraordinarily low
interest rates distort the price of money, arguably the single
most important price signal in a market economy. They
poison the business environment, allowing poorly run busi-
nesses to survive, jamming the gears of creative destruction
that drive any economic renewal. The survival of poorly run
businesses also suck profits from more successful businesses,
sapping their ability to expand.
Against this backdrop, any number of missteps could trig-
ger chain reactions that push developed world economies
into recession. But we should also be prepared for a poten-
tially different kind of downturn. The accept-
ed definition of a recession is two consecu-
tive quarters of contraction in an economy.
The next recession, however, may not tech-
nically qualify as one. For example, we could
have one quarter of 0.3% growth, followed by
a contraction of 1.2% the next, then anemic
growth in the third and fourth quarter of, say,
0.1% each, and then another contraction of
0.5% and so on. While the technical definition
of a recession may never be met, the economy
would still be shrinking, left to wane inexora-
bly by impotent monetary and fiscal policies.
It would be a recession by stealth. F
IMF Managing Director, Kristalina Georgieva speaks
at the IMF and World Bank Group annual meetings ANDREW CABALLERO-REYNOLDS/AFP/GETTY IMAGES
in Washington in October.