Global recession unlikely as inflation rates to remain low

The US labour market, corporate and financial imbalances in the private sector show a positive outlook


A global recession is unlikely to happen this year as inflation rates remain low, while monetary policymakers have adopted stances to accommodate the financial cycle, according to Harvard Club of Malaysia president Professor Tan Sri Dr Lin See-Yan (picture).

In his keynote address at the Asian Strategy and Leadership Institute Economics Conversation in Bandar Sunway yesterday, Lin said for many global markets, the yield curve and credit spreads are now pricing in a probability of recession of at least 50% within the next 12 months.

“This recession risk seems to me to be far too high, especially in the US. The strength of the US labour market and recent indications from the US Federal Reserve (Fed) that it will pause its rate increases, should protect the economy from a severe setback this year. As goes America, so goes the developed world,” he said.

However, he noted that asset price turbulence will return, setting in train a tightening in financial conditions that could independently cause a recession.

Fears of a global recession have risen in recent months in light of volatility in financial markets triggered by geopolitical crises, as well as the “10-year cycle”, which notes that past recessions have taken place within 10 years of each other.

There have been two contradicting views on the global economy, where optimists view that advanced economies are safe from a severe downturn due to low inflation rates and the “not yet over-stretched” state of the financial cycle.

On the other hand, there are views that stagnationary forces will prevail, perhaps triggered or exacerbated by an unpredictable financial shock.

Lin said the optimistic outlook notes that the US labour market, corporate finances and financial imbalances in the private sector remain in good shape, thus implying that most recessions are caused by a tightening in monetary policy needed to keep inflation in check.

This view, which stems from repeated episodes before the 1980s, sees little recession risk this year because inflation remains well below target.

A more pessimistic assessment takes into account the slowdown in China’s economy, the depressing impact of secular stagnation and failure of US fiscal authorities to prepare infrastructure spending in advance to stabilise demand.

This view sees recent financial turbulence as correctly anticipating — not causing — a weakening economy.

“In my opinion, the optimistic view is probably right. Recessions and bear markets may well both be avoided in 2019,” Lin said.

The former Bank Negara Malaysia deputy governor said the most apparent risk posed by governments to businesses today is the power of populism and nationalism in advanced democracies.

For a generation, market participants presumed these were emerging-market issues, whereas Europe and the US were seen as stable business and investment environments, with predictable shifts among established political parties.

“No longer. Make no mistake. Today, advanced economies are generating the most disruptive political risks to business. US President Donald Trump’s shift to protectionism is one example. A disruptive Brexit is another. Italy’s fiscal choices could yet roil markets,” Lin said.

Other business risks include rising regulatory chaos that have already begun to constrict opportunities for cross-border transactions, national security reviews that are disrupting trade, investment and supply chains, and widening inequality worldwide.

Separately, Pemandu Associates Sdn Bhd president and CEO Datuk Seri Idris Jala said he is confident that the Malaysian economy stands to benefit once the Pakatan Harapan administration completes the transition process.

“When you are a new government — particularly where this country has had the same government for a very long time — there is a transition. You can’t start a new beginning unless you manage the ending. Then you enter a neutral zone, and then you start a new beginning. You can’t jump entirely into a new beginning because there’s a time when the old and new are still coinciding,” he said.

Idris, who is known for his transformation efforts at the government’s former Performance Management and Delivery Unit (Pemandu), as well as at Malaysia Airlines Bhd, said the present leadership is still in the transition period.

“I am hopeful that in time…when they are very clear about their priorities, things will go on well. Only good things can come from there. But it requires leadership,” said Idris.

The Pakatan Harapan administration has been in office for close to 10 months since it ended 61 years of the Barisan Nasional coalition’s rule during the 14th General Election on May 9 last year.