Will 2016 be the next Recession?

George Soros, a major hedge fund investor who once towed down Bank of England has predicted over next slowdown in 2016 (published in The Economist). And the likely indicators are Chinese slowdown, negative interest rates in Europe and Japan, low commodity prices. But, at the same time there seems to be some bright spots like US and India with decent growth numbers. But is that so? When India is performing below its potential growth rate (8% on basis of incremental capital output ratio) or US showing low consumption demand (recently concluded Christmas month), Can we count on these bright spots? Or when China is putting best effort to shift to consumption driven economy rather than export driven, Can’t we wrong in putting it into dark spot? Let’s start from last century debacle and learning (1930 Great Depression)

The world has followed the learning of 1930s Great Depression crisis in the post 2008 Great Recession through Keynesian approach aided with monetarists (linked with fiscal expansionism and monetary easing). After Great Depression of 1930, New Deal of FDR (Roosevelt) focused on public expenditure adding jobs and increased buying power of people in USA. It was a major event in bringing American economy out of recession. After 2008 recession, following same lines of boosting demand to recover economy has been followed. And this has been tried through monetary easing, buying toxic assets from market by Fed and giving easy money in hands of people (Keynesian approach includes targeting demand rather than supply in an economy). And this approach is based on assumption that public expenditure will crowd in private investment and private production and economy start rolling.

In 1930s it was direct government involvement or fiscal route while in post 2008 it was through monetary route. This easy money has been offloaded to developing nations like India, China and ASEAN in search for better returns. And since financial markets are dominated by few investment giants (in words of Piketty, another case of rising inequality), this has not been a difficult task. As a result, crowd in effect has not been that substantial as expected. And recent low consumption data and poor output data in US points to same (US still not recovered). What was successful in 1930s and subsequently can't be repeated again in this financially connected global economy.

In aftermath of 2008, there appeared many other dark spots in various other parts of world. The Europe has still not recovered of Greece crisis of 2010-11 owing to poor coordination, negotiation and understanding. And recent Refugee crisis of 2015 has imposed existential threat to Euro area with ban on free movement of labour. Also, low commodity prices specially of crude oil has further limit the development expenditure of oil rich nations (like OPEC and Russia). This has negatively impacted the infrastructure firms to its maximum (like that of L&T, with major orders in Gulf countries). This very low (<$30) price of oil is although good for importing nations like India and China; but on global level this is hurting. In fact, crude oil price <$40 and >$80 always hurts the global economy. Too low a price, hamper global expenditure while too high a price, a drain of resources.

Amidst all this, China which was earlier the major bright spot of world economy (when India was suffering with scams and policy paralysis) has also cooled down. With global demand declining for Chinese exports (US and Europe distress) and production shifting to consuming nations (thanks to 3D printing technology alike), Chinese economy is shifting its gear towards consumption driven. And change of economy fundamentals is time taking and rough. If not handled soundly, China can become the trigger of another slowdown.

The only bright spot available are India and Africa, but they are too small to boost the global economy. They are always in the shadow of political instability or policy paralysis.

Taking account of all the recent events, data and economic health of nations; the world seems to be at the brink of another recession. And so is any normal economy, which runs on a knife edge equilibrium of trusts and faith between suppliers and consumers. If that trust and faith are being restored by political class of world, there will be instead a growth story. And that faith can be restored through easy landing of Chinese economy without hampering other nation’s growth (through avoiding deliberate devaluation), making monetary decisions on global cues and not just domestic, global mutual solution to refugee crisis and economic interests over political ones (US-Russia and Iran-Saudi Arabia enmity).