By Benard Ayieko
The scorching sun in Nairobi has risen to unprecedented levels. The heat is just unbearable – day and night. Kenya’s capital is visibly busy with citizens trying to eke out a living perhaps oblivious of the financial trends in the global economy that could slow their personal financial growth. What is clear to everyone and especially those working in the informal sector is that the cost of living has risen significantly and it calls for more hard work to meet your usual basic needs.
A consumer basket for a nuclear family of three has shrunk significantly in the last few years. To balance the growing consumer needs against stagnant personal income, households have opted to cut down on goods that make up their consumer baskets. If not, they have resorted to consume what economists call ‘inferior goods’. So much so that in a cluster of goods say soft drinks, you resort to consume a soft drink with the cheapest price on the shelf. Same applies to foodstuff; instead of high grade sifted maize flour that costs almost US$ 1.5 for a kilogram, households have opted for the low grade unsifted posho mill maize flour that costs less than a dollar for a kilogram.
I could go on and on to show you how Kenyans have tightened their belts even though they have folded their shirts. Economic analysts point to a problem that could be bigger than the dictates of the local economy. Some analysts are so skeptical to an extent that they think that these pointers are salient features of a global economy that is sliding into recession. There are numerous economic fires in almost every corner of the world. But where are the firefighters? Look at the economic bust in Latin America – Brazil, the largest economy in the region is slowly grinding to a halt for various reasons.
Other recent global occurrences point to a global economy that is under siege. In some areas, even though things are moving forward, the slow-pace is worrying. The American election has also thrown the world into a chill mode. The race is shaping up and looks likely that the democrats will have Hillary Clinton as their presidential flag bearer while the republicans are moving closer to handing the mantle to Donald Trump. Mitt Romney and others who share his views cannot fathom a Trump presidency. But take a deep breath, America remains the only country full of surprises – they say it is a land of opportunities. I leave it to the Americans to decide on Tuesday, 8th November.
The genesis of forecasts on the global economic recession gathered momentum last year when IMF reports pointed out that global growth in 2015 heading into 2016 will experience a slow puncture making the global economy to slide into its slowest growth rate since the recession of 2008. The report further explained that $3 trillion corporate credit crunch was looming as debtors face a challenging future. It also points to a ‘triad’ of global risks that could eventually push the world to the brink of a new financial crisis with greater ramifications than before. ]
True to Truman’s words; “the buck stops here”, IMF says that the buck stops with the governments and the central banks of world economies to craft solutions to risks that are facing the current global economy. Key pointers to this global financial crisis are the recent global market ructions including the fall in oil and other commodity prices, global terrorism threats, concerns about the health of the Chinese economy and Federal Reserve actions on the dollar and interest rates. This has clearly sucked more money out of emerging economies into the rich world leading to heavy devaluations of the developing countries’ currencies. For instance, according to Bloomberg; the year to date statistics shows that the shilling has depreciated by about 11.29%, South African Rand by 13.78%, Ghanaian Cedi by 15.7%, Ugandan shilling by 20.5%, Tanzanian shilling by 23.56% and Zambian Kwacha by 47.36% to the dollar and the list is endless. As a partial remedy, the floating exchange rate regime has acted largely as a corrective measure to the current currency devaluation thereby slightly cushioning the economies of developing democracies against the impact of the downturn.
Analysts are calling for a sober approach to the challenges facing the world economy. They agree to the fact that during the previous financial crisis, only advanced economies were controlling a larger stake of the global economy but now emerging economies have a significant hold in the world economy. To some, nothing would go wrong since a slow growth in developed countries is traded-off by the boom in emerging economies. On the contrary, if the current recession in Brazil – the largest economy in Latin America and an emerging economy that weathered the storm of the 2008 financial crisis is something to go by, then the global economy could as well be basking in an inferno.
The global economy is set for emerging market mass default according to a report by the IMF which says that higher U.S. interest rates have exposed major weaknesses in emerging economies’ markets since both public and private sectors have gobbled-up cheap debts. IMF’s warning comes at a time when the Federal Reserve is prudently managing the dollar resulting into massive devaluation of countries’ currencies globally. The rise in U.S. interest rates is also a major factor, which could trigger a wave of emerging market corporate defaults and heavy panic in financial markets as liquidity sublimes. The tell tale signs are there and where there is smoke, there is fire. IMF report goes further to say that the corporate debts in the emerging markets since 2004 have grown exponentially by over 350%. The corporate debt stood at $18 trillion in 2015 up from $4 trillion in 2004. In slightly over a decade, the corporate debt in emerging markets has almost quadrupled accompanied by weaker balance sheets. This is not music to our ears. The net effect of this superficial growth is that it has made many corporate bodies vulnerable to the U.S. rate spikes.
The grim situation is compounded by the fact that most emerging economies that have a larger stake in the affairs of the global economy are still exposed to the effect of the increase in Fed rates. This is the reason why emerging economies must start preparing adequately for a rise in corporate failures. Any further delays in cushioning their economies against this potential risk will leave them heavily exposed to the systemic global financial risks. As a result of this, IMF’s Financial Stability Report has warned that this increase in Fed rates could create a credit crunch, similar to the one experienced in 2008 and that risks will spill over to the financial sector and generate a vicious cycle as banks curtail lending.
One might ask; how does the Federal Reserve action influence the global economy? You will recall this phrase that “when United States sneezes, the world catches a cold”. In that phrase lies the answer – the U.S. economic policies are somewhat connected to the domestic policies of individual countries. The Federal Reserve which is the central bank of the U.S. plays a key role in formulating the monetary policy that affects foreign exchange value of the dollar – perhaps the only internationally accepted medium of exchange for goods and services. So when the U.S. monetary authorities decide to intervene in the foreign exchange market, it’s the Federal Reserve that executes this intervention. This intervention then reverberates across the international financial system through action by central banks of individual countries. This action is reactionary and that is how inter alia the Fed is so influential on the global financial system.
The reality of an imminent global recession is amplified by the fact that the so-called growth in the recent years has been fueled by government bailouts, loose monetary policy and huge injections of capital in the form of quantitative easing. Today, the feeling in most economies is that the recent growth will converge soon because it was not laid on strong economic fundamentals. The situation in the European economy is also a greater signal to the current pessimism. Portugal, Ireland, Italy, Greece and Spain, jointly referred to as PIIGS, for instance, have been repeatedly bailed by the EU and IMF, albeit with mandatory austerity measures that nationals have resented. Such measures have also restricted growth in these economies by reducing aggregate demand and has kept the debt burden extremely high. The Greece bail out fiasco is a perfect example.
Other factors such as increase in the debt problem globally, high unemployment rate, central banks’ loose expansionary monetary policy to stimulate growth in slowing economies, among other factors point to a tottering global economy.
We may be on the verge of another global recession but patterns and information drawn from economic data from different sources are showing signs of weakness, and the troubles persisting in Europe or the bubble busting in China may just be the final trigger that sends the global economy over the edge. Unlike in 2008, when central banks were able to lower interest rates and expand their balance sheets – currently, central banks have less leg room to move and enact loose expansionary monetary policy to prevent a recession from happening but they can act prudently to mitigate the risks in their domestic economies.
Recessions, agrees a friend pursuing a PhD in economics in South Africa, are a normal part of the macroeconomic cycles that the world must experience. Such business cycles, he adds, may cause instability in the global financial sector if not well managed. The writing is on the wall – the next global recession could just be around the corner.
