PETALING JAYA: There is a 50% chance of a lengthy global recession striking within the next 12 to 18 months, warns Moody’s Analytics.
The silver lining is, the impact of the upcoming potential recession may not be as deep as the previous economic downturn a decade ago.
The warning from Moody’s Analytics Asia-Pacific chief economist Steve Cochrane came as the Sino-US trade war turned worse amid slower global growth and the race by major central banks globally to cut interest rates.
“The trade war has escalated beyond expectations and the stakes are high for the global economy. Our global recession odds for the next 12 to 18 months have increased from 40% to 50%.
“The 2008 recession was caused by imbalances in financial markets, causing a very deep recession.
“On the other hand, the next recession would be caused more by a loss of business confidence, declines in investment and less hiring or a loss of jobs. It would not be so deep, but it could be lengthy as it is difficult to turn around business and consumer confidence and as inefficiencies arise in global supply chains, ” Cochrane told StarBiz in an email interview yesterday.
Cochrane’s statement on a gloomier global economic outlook follows Finance Minister Lim Guan Eng’s announcement a few days earlier on the government’s plan to introduce contingency measures in Budget 2020, in the event that the trade dispute escalates or worsens.
“Definitely, there would be (a) contingency package to try to as much as possible insulate Malaysia from any adverse impact from this trade dispute, ” said Lim on Aug 5.
Standard Chartered Global Research, in its latest report, pointed out that “the global dovish wave has strengthened”.
“Slowing growth, lower-than-expected inflation and rising downside risks have caused central banks around the world to turn increasingly accommodative.”
On the Asean region, the research firm expects central banks to turn more dovish than before, with policy rate cuts in Indonesia and the Philippines.
As for Malaysia, Standard Chartered Global Research expects the country’s economy to remain healthy in 2019, although external challenges have kept growth sentiment cautious.
“We lower our 2019 gross domestic product growth forecast to 4.6% from 4.9%. While resilient private consumption should buffer the economy against external uncertainty, growth is not immune to the poor external environment.
“We expect Bank Negara to remain neutral and watchful for now. We maintain our neutral short- and medium-term weighting on the ringgit.
“We maintain our neutral duration outlook on the Malaysian Government Securities (MGS). The dovish pivot by global central banks is supportive of the MGS market, even as we expect Bank Negara to stay on hold this year, ” it said.
The Sino-US trade war went from bad to worse on Aug 1 after US president Donald Trump slapped an additional 10% tariff on the remaining US$300bil worth of imports from China, effective Sept 1. This will bring the total value of goods subject to tariffs to around US$550bil, broadly equivalent to total imports from China into the US.
Trump also hinted that he could increase or reduce the tariff rate, depending on the outcome of the negotiations between the US and China.
According to Moody’s Analytics, the latest additional tariff on China would raise the total effective tariff rate by the US to 5.4%, as compared with the 1.5% seen at the end of 2017.
The research house cautioned that the situation may turn worse if Trump decides to raise the latest tariff from 10% to 25% on the remaining US$300bil of imports from China.
“This ‘full trade war’ scenario would see the US and China entering an entirely new world of trade with effective tariff rates of 7% and 12%, respectively, ” it said.
On a positive note, Moody’s Analytics said that the latest round of tariffs could be beneficial for the lowest-cost countries in South-East Asia and elsewhere, as the shift of low-cost goods production out of China would be accelerated.
“One factor that could weigh on this process is the need to quickly change and customise consumer goods because of fashion trends and multiple versions of a product, like sneakers.
“So, even with consumer goods, the shifts in investment locations may not happen as quickly as expected, possibly delaying the positive impact that could drive the less-developed countries of Asean, or even Africa, ” it said.