Is a global downswing approaching?

WITH fears of a possible global slowdown, how should leaders act so as not to be blindsided by the cyclical downturn, if it occurs?

Protectionism, trade wars and political turmoil certainly will not help; the effects of these negative developments may exacerbate the slowdown.

Going backwards on 20 to 30 years of global free trade and fanning trade wars in self-interest will weaken growth as products become more expensive and global sales momentum slows down.

With the European Union trying to secure an exemption from US steel and aluminium tariffs, the suggestion is for a multilateral approach to solve the steel overcapacity issue said to be caused by China.

Already taking steps to reduce the overcapacity in steel, China has warned of stern action over the tariffs and urged for respect of the multilateral trade system.

Political turmoil, involving staff turnover in the White House, adds to the uncertainty.

And risk-taking creates bigger asset bubbles especially in an environment of rich valuations.

It is said that when so many economies are strengthening at the same time, it is time to be cautious.

“Countries should take advantage of this period of strength to secure a durable recovery through accelerated reforms,” said Socio Economic Research Centre executive director Lee Heng Guie.

Quarter-over-quarter annualised gross domestic product (GDP) growth rates in the United States, the eurozone and Japan, have turned down.

In all three economies, growth peaked in the second or third quarter of 2017, and fell in the fourth quarter.

“This is what the start of a synchronised global growth downswing looks like,” said Bloomberg View writers Lakshman Achuthan and Anirvan Banerji.

“(Also), South Korea’s GDP contracted in the fourth quarter of 2017, partly due to the biggest drop in its exports in 33 years,” they added. It is debatable whether tax cuts will help offset this kind of cyclical downturn.

Such slowdowns tend to cut GDP growth by quite a bit more than the expected gain from the tax cut, said the writers in an earlier article.

Since the last recession, the United States has experienced three cyclical slowdowns from 2010-2011, 2012-2013 and 2015-2016.

Still, the introduction of the US tax cuts may be timely as “tax refunds will now be forthcoming just as a slowdown may be felt later this year in the United States,” said Inter- Pacific Securities head of research Pong Teng Siew,

A second round of tax cuts may have an expansionary effect. “The net effect will be higher tax revenue from heightened economic activities, and the budget deficit may not be higher, after all,” said Fortress Capital CEO Thomas Yong.

However, this may overstretch finances; “(instead) some rationalisation of US corporate and personal income taxes may be necessary,” said Pong.

Governments with fiscal room must continue with their stimulus to support domestic demand, said Lee, adding that 2018 has the potential for pockets of event risks and turbulence.

“Some of these stem from the unpredictable behaviour of President Donald Trump and his loyalists,” he said.

In their trade war, countries should be aware that protectionism leads to an erosion of social welfare globally.

“It is not the primary metal but secondary downstream industries fabricating metal products that create jobs.

“Tariffs (on steel and aluminium) may raise prices and actually destroy domestic demand for fabricated metal products,” said Pong.

Excessive risk taking that can spark a financial crisis, the pace of rate hikes (which may turn aggressive) and withdrawal of monetary support by the Fed will be sensitive issues ahead of a downturn.

“Hawkish shifts in the face of economic slowdowns that policy makers don’t see coming, rarely turn out well for the economy,” said the writers.

CEO of DoubleLine Capital Jeffrey Gundlach is looking at a weaker dollar.

“The odds are good that the next big move in the dollar is lower,” he was quoted as saying by Bloomberg.

Will that give a further boost to the ringgit? “The ringgit is range-bound for now, and noticeably weaker against the Thai baht,” said Pong.

“The ringgit should strengthen against the dollar if the latter continues to weaken against other major currencies,” said Yong, adding that the ringgit would be supported by strong exports and higher oil prices.

While a weaker dollar is generally good for the ringgit, the strength of the local currency must be underpinned by strong domestic demand, a contained budget deficit and continued surplus in the current account, said Lee. Concerns over the US budget and current account deficits, and political dysfunction in the White House may, among other factors, be pushing the dollar lower.