Risk of global economic downturn

Increased globalisation means that an economic downturn in one place may spread to the rest of the world. Danske Bank’s analysts are seeing ominous signs that such a downturn may materialise in the next year or two.

An escalation of the trade war between the US and China or war in the Middle East may lead to a global economic downturn – something that has happened only four times in the past six decades. Those are the words of Danske Bank’s head of international macro and emerging markets research, Jakob Ekholdt Christensen. He believes that there is a 30 per cent risk of a global recession coming in the next year or two.





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Such a recession could unfold as a negative economic shock that causes businesses and consumers to take a less positive view of the future. This in turn will throw consumer spending, investments and employment rates into a negative downward spiral.

Upswings die of illness
According to Jakob Ekholdt Christensen, this is the classic course recessions take. However, unlike many previous recessions, which have typically been national or regional, the risk of a global recession is higher today because increased globalisation means that national economies are more interwoven and have become more mutually dependent.
 

The most recent global recession was in 2009 in the wake of the financial crisis – a recession caused by economic imbalances in the US impacting almost all other economies. In the US and Germany, the subsequent economic upswing has been the longest ever, but recessions do not arise just because the preceding upswing was extended. Economic upswings die of illness, not of old age.

Jakob Ekholdt Christensen

Head of international macro and emerging markets research

Helicopter drop or fiscal policy
Among economists, the key question right now is what to do if a new economic downturn hits.

Record-low interest rate levels, for example, mean that the monetary room to manoeuvre that existed in 2008 and 2009, allowing central banks to stimulate economic growth through rate cuts, is no longer there. In Japan and Europe in particular, central banks have little latitude in the area, if at all any, says Jakob Ekholdt Christensen.

"One option would be for central banks to start depositing money directly into people’s bank accounts in the hopes of stimulating economic activity on what is known as the demand side of the economy", explains Jakob Ekholdt Christensen.

This is a type of monetary policy intervention dubbed ‘helicopter drop’ by economists because, figuratively speaking, it equates to flying around in a helicopter and dropping money. Such a measure would, however, be both extreme and controversial at the present time, but the likelihood of it happening is increasing.

"However, many central banks would prefer that heads of state and governments start stimulating economic growth by using fiscal policy tools such as an increase in public spending or in investments", says Jakob Ekholdt Christensen.