Clouds on the global economic horizon

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It is not only Pakistan facing dire economic situation but signs are emerging of a wider economic malaise. There appear dark undercurrents in the global economy worrying economists who cannot figure out which way the future economic cycle will move to. The tensions are palpable as the vulnerabilities of global financial system have started to become more manifest. The last financial crisis was precipitated by the West but this time round it appears that the East will come out with an equivalent crisis.

The signs are that international economic thinkers are full of doubts about the financial health of the global economy. The veritable indications were the presence of discernible doom and gloom expressed during the recent meetings of the World Bank and International Monetary Fund. The main cause of worry is the contagion detected in emerging markets where the inherent weaknesses have failed to cover the booming growth.

IMF had repeatedly indicated that the economic growth in Turkey and Argentina was full of high risks and that any negative fallout will severely impact the adjoining Asian economies as well. The fears were not unfounded as India and Indonesia witnessed steep depreciation in their currencies that have created new low records seriously harming the overall health of their economies.

The only ray of hope is that IMF still does not seriously view the spectre of a serious spill-over of the vulnerabilities inherent in emerging economies. Though IMF contains data about many economies whose vulnerability levels are higher than some of their ilk but currently IMF is just monitoring the situation rather than switching the panic button.

One of the serious consequences of falling currency rates is the massive cash outflows disappearing abroad. The previous such massive depreciation of currency was witnessed in Indonesia during the Asian Financial Crisis that compelled Indonesia to seek an IMF bailout despite performing very well. Many other East Asian countries turned towards the IMF who were performing well but the inherent vulnerabilities brought about currency crisis with widespread offshoots.

Currently the systemic risk is lower than the last two decades but the prospects of devaluation in Chinese yuan may bring about a real difficulty. The risk is very real as the ensuing trade war between China and America has seriously upset the Chinese economic juggernaut and any negative fallout from Chinese economy may seriously hurt the region and its reverberations could be felt as far as Pakistan. Pakistan is already facing serious financial difficulties and is trying to balance its debt imbalance.

The prospects of China getting gripped by any economic downturn are indeed worrying because it is the biggest trading partner for most Asian countries including Indonesia. Similarly its trade linkages are spread over to South Asia with it maintaining wide-ranging trade relations with the countries of the region including Pakistan and India. This means that any weakness in the Chinese currency will certainly have a spillover effect on regional currencies whose goods will become more expensive than the Chinese goods effectively unbalancing them.

The crux of the worry shown by economists is the ongoing trade war between China and the US that is rated as the most significant development after the end of the Cold War that has the real potential to very adversely affect the global trade balance. Due to the war, both countries have seen their growth outlook getting reduced but China appears to be worse off than America according to IMF data. The trade figures are not very encouraging as China is expected to grow by 6.6% this year but next year IMF sees a reduction to 6.2% – shaving 0.2% from the IMF’s original forecast.

IMF has also reported that Chinese efforts to boost growth due to the trade war have somewhat lessened the impact on growth but one potent way for it to face the effects of the trade war could be to devalue its currency but IMF is resisting employing devaluation as a means of competition and China agrees to this principle but the fact is that its currency has already lost close to 10% of its value this year and it is feared that it may further go down.

In wake of the growing chances of an economic crisis, Pakistan is in the eye of the storm because it is now facing the backlash of Sino-US trade war as the US is castigating Beijing’s debt diplomacy. Trump administration is bent upon harming China as it is afraid of the growing Chinese economic clout. The prospects of the US officially declaring China as currency manipulator are real and that may further ratchet up the trade war. The global financial institutions are also worried by ongoing political crises that are negatively impacting global economic growth. Brexit has become a large economic drawdown mechanism as many European economies will feel its adverse affects.

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