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A new recession ?!

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Are we headed for a global economic recession? We might well be, if experts are to be believed. Bank of International Settlements (BIS) is called the central bank of central banks. It is one of the most important financial institutions in the world. BIS has warned of a “gathering storm” in a new report on the global economy.

The BIS report warned, “Underlying some of the turbulence was market participants’ growing concern over the dwindling options for policy support in the face of the weakening growth outlook. With fiscal space tight and structural policies largely dormant, central bank measures were seen to be approaching their limits.”

According to BIS, investors across the world were worried that the governments of all countries were fast running out of policy options. Claudio Borio, the CEO of BIS says, “The tension between the markets’ tranquility and the underlying economic vulnerabilities had to be resolved at some point. In the recent quarter, we may have been witnessing the beginning of its resolution.”

Mr. Borio adds, “We may not be seeing isolated bolts from the blue, but the signs of a gathering storm that has been building for a long time. Against the backdrop of a long-term, crisis-exacerbated decline in productivity growth, the stock of global debt has continued to rise and the room for policy maneuver has continued to narrow.”

The biggest disruptions in the global economy over the past three months have been the rate hike by the US Federal Reserve and China’s continuous slowdown. Weak oil prices have added further to the general lack of confidence in the economy.

There is a lot of unease among investors about the state of the global economy and the health of global banks. As Mr. Borio says, “debt is what helps us understand apparently unrelated developments”.

He talks about how public sector debt has risen across the world while private sector debt remains high in emerging countries. He further links the mounting debt to the fall in oil prices as some “highly indebted oil-producing firms come under pressure to keep the spigots open to meet their service burdens.”

Over the last few days, markets in Asia have been doing well and have been slowly but gradually been able to climb out of the hole that they were in only a few months ago. But if one was to go with the BIS report, it suggests that it might just be a temporary comeback.

One can only hope that the situation doesn’t get back to how things were back in 2008, when millions of people across the world lost their livelihood, their homes and a substantial chunk of their savings.

Author: Raghav Hegde – India

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