Another global recession?

Last week, murmurs were heard in high places around the world that the global economy would face another recession. Experts opine that there is a 15% chance of a new recession. This is double the chance they believe existed at the beginning of 2011.
Several developments, especially in Europe and the US, fan this fear. First, the US recovery from the last recession has been fragile. Its economy is much more susceptible to geopolitical shocks. Second there is a rise in fuel prices. The political instability in the Middle East is far from over. This is causing risks for the country and the international economy.
Third, the global food prices in July this year is markedly higher than a year ago, almost 35% more. Commodities such as maize (up 84%), sugar (up 62%), wheat (up 55%), soybean oil (up 47%) have seen spike in their prices. Crude oil prices have also risen by 45%, affecting production costs.
In the US, even though its debt ceiling has been raised and the country can now continue to borrow, credit agencies have downgraded its credit rating and therefore its stock markets have started to flounder. World Bank President Zoellick recently said: "There was a convergence of some events in Europe and the US that has led many market participants to lose confidence in economic leadership of the key countries." He added: "Those events, combined with other fragilities in the nature of recovery, have pushed US into a new danger zone."
Employment in the US has, therefore, come near to a grinding halt. Prices of homes there continue to slide. Consumer and business spending is slowing remarkably.
So, when the giant consumer economy slows down, there would be less demand for goods she buys from abroad, even from countries like Bangladesh. This would lead to decline in exports from such countries to the US. Then these economies would start to slide too, leading to factory closures and unemployment on a large scale. There would be less money available for economic development activities.
Adding to the woes of the US economy are the travails of European economies. There, countries like Greece and Portugal, which are heavily indebted, have already received a first round of bailout. But this is not working. A second bailout has been given to Greece. But these countries remain in deep economic trouble.
Bigger economies like Spain and Italy are also on the verge of bankruptcy. More sound economies like France and Germany are unwilling to provide money through the European Central Bank to bail them out. A proposal to issue Euro bonds to be funded by all the countries of the Euro Zone has also not met with approval.
A creeping fear of the leaders of such big economies is that their electorate is not likely to agree to fund bankruptcies in other countries through the taxes they pay. Inevitably, they are saying that these weaker economies must restrain expenditures and thereby check indebtedness and live within their means.
Thus, with fresh international bailouts not in the horizon and with possibilities of a debt default by countries like Greece, there is a likelihood of a ripple going through the world's financial system.
Now what is recession and especially one with a global dimension ?
There is no commonly accepted definition of a recession or for that matter of a global recession. The International Monetary Fund (IMF) regards periods when global growth is less than 3% to be a global recession. During this period, global per capita output growth is zero or negative and unemployment and bankruptcies are on the rise.
Recession within a country implies that there is a business cycle contraction. It occurs when "there is a widespread drop in spending following an adverse supply shock or the bursting of an economic bubble." The most common indicator is "two down quarters of GDP." That is, when GDP of a country does not increase for six months.
When recession occurs there is a slowdown in economic activity. Overall consumption, investment, government spending and net exports fall. Economic drivers such as employment, household savings, corporate investments, interest rates are on the wane.
Interestingly, recession can be of several types. Each type may be literally of distinctive shapes. Thus V-shaped, or a short and sharp contraction, is common. It is usually followed by a rapid and sustained recovery. A U-shaped slump is a prolonged recession. The W-shaped slowdown of the economy is a double dip recession. There is also an L-shaped recession when, in 8 out of 9 three-monthly quarters, the economy is spiraling downward.
So what type of recession can the world expect in the next quarter? Experts say that it could be a W-shaped one, known as a double dip type.
But let us try to understand why the world is likely to face another recession, when it has just emerged from the last one, the Great Recession in 2010. Do not forget that this recession had begun in 2007 with the "mortgage and the derivative" scandal when the real estate and property bubble burst.
Today, many say that the last recession had never ended. Despite official data that shows recovery, it was only a modest recovery.
So, when the recession hit the US in 2007 it was the Great Recession I. The US government fought it by stimulating their economy with large bailouts.
But this time, for the Great Recession II, which we may be entering, there is a completely different response. Politicians are squabbling over how much to cut spending.
Therefore, we may be in a new double dip or W-shaped recession.
What is likely to happen in Bangladesh if the second recession comes around?
Already, we see that export orders in the Ready Made Garment (RMG) sector and in Knitwear have started to fall, both from the US and Europe. Inward remittances from our workers are also declining due to trouble in the Middle East. These two reasons could slow our economy. But Bangladesh is also diversifying her economy. We may yet be able to overcome losses if any.
But this would need looking for new markets for our products. Russia and China are awash in liquidity and can give us new orders in RMG and knitwear. We need to build new commercial links quickly.
Our domestic market also needs to be developed. This can absorb much of the pressure. We have a large consumer base ourselves. Our growing middle class have the taste and the money. Our government may have to provide another stimulus package to our garment industry. Our manpower also need to be sent to new markets. Remittance sent by them can make up for the lost revenue from the Middle East.
Who knows, Bangladesh could emerge different if there is Great Recession II in a few months time.

The writer is a former Ambassador and Chairman of the Centre for Foreign Affairs Studies.
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