FIRST PERSON - Alex Magno (The Philippine Star) - August 17, 2019 - 12:00am

The New York Stock Exchange (NYSE) lost 800 points during Wednesday’s trading, the biggest single day drop in many years. Markets all over the world followed suit.

Although the NYSE recovered 100 points in Thursday’s trade, the situation remains anxious. There is little good news to go around. We are likely to see a choppy pattern the next few days as markets reel from another episode of volatility.

The latest panic to hit Wall Street was precipitated by the occurrence of what is called an “inverted curve.” This is a phenomenon where the yield for shorter-term bonds falls below the yield for longer-term ones. Last Wednesday, the yield on two-year treasuries rose slightly above the yield for ten-year paper. Those are vital numbers.

The normal state is long-term bonds yield higher than short-term bonds. It is presumed that longer-term paper incur greater risks.

Nearly each time an inverted curve happens, recession follows a few months ahead. This is what caused last Wednesday’s sell-off.

The expectation for a global recession happening is becoming widespread. Germany and Britain’s economies suffered negative growth in the last quarter. Growth for the entire Eurozone is expected to flat in the succeeding quarters.

Earlier this week, the Argentinian peso plunged 20 percent. Singapore and Hong Kong drastically cut their growth projections – both small but powerful economies being most vulnerable to trends in the global economy. Not much growth is expected from Japan. China’s manufacturing output fell dramatically in the first half of this year.

The gloomy sentiment in the global markets caused oil prices to drop. If projections of slower global growth are correct, this will reflect in dropping demand for the commodity. The OPEC is convening next month, very likely to cut production further in order to stabilize prices.

If Brent crude holds its current price at under $57 per barrel, we can expect another round of oil price rollbacks next week.  That will go a long way in helping us pull down our inflation rate. Some analysts are predicting a 1 percent inflation rate for the rest of the year.

Falling oil prices is not entirely good news, as I pointed out in my column last Tuesday. While consumers may rejoice at the pumps, they also signal a weakening global economic environment.

With growth rates falling all around us, it might be difficult to meet the growth targets we have set for ourselves. Given the lower-than-expected growth performance in the first half of the year, we need to sustain a growth rate of 6.4 percent in the second semester just to meet the bottom end of our 6 percent to 7 percent growth targets.

The choppiness in the global markets will likely be complicated further by flashpoints already in the bag. The protests in Hong Kong will likely carry on unless China intervenes with force. Such intervention, however, will be disastrous for the economy and a calamity for China’s prestige.

Although Trump blinked and suspended the 10 percent tariff on $300 billion more of Chinese exports, Beijing has announced “counter-measures” against the US. This indicates the trade tensions between the two economic giants will linger on. New trade tensions between Japan and South Korea will not be helpful for the region.

Then there is the growing possibility that Brexit will happen without a deal with the EU this October. The economic fallout is incalculable.

Central Banks

With all the major economies showing signs of weakness, only timely and substantive monetary intervention from the major central banks is seen as the last card to save the global economy from a crippling economic recession.

Recall that when the 2008 global financial meltdown happened, the world’s central banks stepped in and bankrolled stimulus measures to revive economic activity. Expansionary monetary policy limited the scope of the recession as well as its duration.

But in 2008, the central banks had much headroom to intervene. They were able to drastically cut policy rates. But rates are already low today. In many European countries, negative interest rates are in effect.

While the major central banks are seen as the last white knight to deal with the general malaise we now experience, their ability to act is seriously limited. They are knights with short lances.

Given all the considerations mentioned above, it is nearly certain our own BSP will continue to cut policy rates and reserve requirement rations over the next few months. The headwinds from the weakening global economic environment dictate that. The BSP Governor’s own predisposition for expansionary monetary policies support that.

There is certainly enough headroom for expansionary monetary policy. When high inflation rates hit us last year, the BSP raised both rates to mop up liquidity – although the same measures also took the wind out of our growth momentum.

 There is a downside to expansionary monetary policy. Lower interest and lower bank reserve requirements also stoke inflation. The first mandate of all central banks is to keep inflation rates low.

Nevertheless, we have to create some wiggle room to counteract the anticipated global slowdown. Precision and timing matter much.

Recall we escaped the 2008 global recession, sparked by the financial meltdown in the US, by adept “counter-cyclical” measures. Those measures included monetary intervention as well as accelerated public spending.

The timely and effective response of the Macapagal-Arroyo administration that kept us out of recession is generally under-appreciated. By avoiding falling into the global recessionary episode, we were able to set the conditions for a decade of respectable growth.

We hope we could repeat that today as dark clouds gather over the global economy.

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