Recession
FIRST PERSON - Alex Magno (The Philippine Star) - August 13, 2019 - 12:00am

The oil companies have lopped a major chunk off oil prices, reflecting price movements in the international market.

For most consumers, this is good news. It means we will be paying less for the fuel we waste in the infernal traffic jams that have engulfed the metropolitan area.

But the drop in oil prices is also bad news.

It is happening despite supply cuts by the OPEC, the violent civil war in Libya and rising tensions at the Strait of Hormuz. It is happening because of dropping global demand for the commodity caused by the slowing down of growth.

Oil prices, in a way, are like the canary in the mine. They signal the health of the global economy. Oil price movement is a barometer of market expectations.

In the last quarter, the UK economy contracted. It could do worse as the chaos of Brexit looms nearer.

The performance of Germany’s economy likewise shows signs a recession could be coming. The political turmoil in Italy could contribute to a widening slowdown across the Eurozone.

The large investment banks have begun trimming down forecasts for US growth. It has become increasingly clear that the tariff binge the Trump administration indulged in could bring consequences more severe than anticipated.

Those old-line mercantilists in Washington fret that free trade is taking away American jobs. It is true that US companies have relocated to other countries in search of lower production costs. Vis-à-vis China, the US maintains a large balance of trade deficit.

But it is also true that free trade creates jobs in the US. Lower input costs enable American enterprises to be more competitive. Cheaper imports enable American consumers to purchase more domestic products.

Higher input costs have created uncertainties for American enterprises. This leads to postponement of investment decisions. That, in turn, drives the dynamic toward a slowdown.

But this might be too complex for someone like Donald Trump to understand.

Trade war

Earlier this month, Trump surprised everyone by declaring tariffs on the remaining $300 of Chinese exports that have so far escaped the punitive measures. At the same time, he declared China a “currency manipulator.”

The charge baffled most analysts. When China supported the yuan to keep it from falling below the psychologically important seven yuan to the dollar, Washington called China a “currency manipulator.” When China allowed market forces to take her currency lower, she was again called out for currency manipulation.

At any rate, Trump’s surprise announcement of new tariffs on Chinese products along with the slide in the yuan’s value brought a seizure of volatility in the markets across the globe. It was perceived that there would be no more trade negotiations between the two economic superpowers that might bring an early end to the trade war.

China allowing the yuan to follow the market is seen as an indicator the Asian power was digging in for a long episode of hostility with the US. A weaker yuan, although it will raise the costs of China’s imports such as oil, will in turn power her export juggernaut. A weaker yuan will also serve to inhibit non-essential imports from the US and Europe. This will, therefore, add to the factors suppressing growth in the Eurozone economies.

China countered Trump’s tariffs by cancelling imports of agricultural produce from the US. This could cause farm bankruptcies in the American heartland, considered Trump’s bailiwick. This, in turn, could cause a political backlash against Trump on the eve of an election year.

To avert that backlash, Trump has been pushing for ever-larger subsidies for American farms. Those subsidies further engorge the American government’s deficits, already bloated by the cut on tax rates for corporations. Although his policies appear headed toward an economic abyss, Trump will likely hold on to them until after elections next year. He hopes to win reelection by policies that appeal to the economic nationalism of his political base.

Any reversal of Trump’s destructive policies will have to wait until election happens late next year. That might be too long a wait for the adversely affected economies already teetering on the brink of recession.

Headwinds

Although recessionary episodes are part of the business cycle, Trump’s unenlightened trade policies could make things more severe. Already, analysts are calling up images of the 2008 financial meltdown.

The slowdown of the global economy due to the US-China trade war and the possibility of another bout with recession produce strong headwinds on our own economic prospects. The 5.5 percent GDP growth reported for the second quarter produced disappointment – even as it may be considered robust in other settings.

In order to grow our economy by 6 percent or more by yearend, we need to grow by no less that 6.4 percent in the second semester of this year. Our economic managers sound confident that could be achieved.

Hopefully, the malignant effects of the failure to pass this year’s budget on time would have diminished. Hopefully, William Dar quickly delivers on his program of rapidly improving our agricultural productivity and raising rural incomes. There are as yet no encouraging indications we can hold on to at the moment.

On the other hand, business sentiment seems tepid, fearful of all the signals that recession could happen soon. The investments we expected to create jobs for our people have not materialized. There is less of the bullishness that characterized the first two years of the Duterte administration.

Things could still change in the remaining months of this year. We are craning our necks looking for positive signs.

CHINA TRADE WAR US
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