Why Global Recession 2020? A Review of IMF’s (2019) World Economic Outlook Report

IMF has warned for a global recession in 2020, and Hong Kong has technically confirmed an economic recession last week by having 2 consecutive negative qtq Real GDP growth in the 2nd and the 3rd quarters of 2019. [1] However, there have been various explanations or excuses for the recession.

For example, HK Government put the blame on the protests and social unrest, but if that is true, then the trend of the economic downturn should not commence before June 2019 and should be confined within the territory. However, both implications are false. The downturn started as early as in 2018 and it is a global phenomenon instead of a local one.

Many economists would consider it the consequence of the US-China Trade War, which is also included as one of the causes in the IMF (2019) World Economic Outlook Report 2019 (WEO). Yet, if this is the reason, then the recession should strike more on the US and China economies. If the consumption quantities do not change, then the trade war would shift the purchase orders from the two fighting countries to other countries, the net quantities should be more or less the same. (The amount may be a bit different due to the exchange rate difference and the price difference). But the reality seems to be a global recession swiping across the board, would it be just a time lag for the market to adapt or is there any fundamental changes that would impose a systemic reduction in consumption? Let’s see the data and the explanations provided by the World Economic Outlook Report prepared by the IMF (2019). [2]

A. A Slowdown in Manufacturing Globally

Figure 1 shows the Industrial Production, World Trade Volumes, and PMI. All of them depict a downward trend since 2018. Both the Industrial Production and World Trade Volumes dipped into the negative zone since early 2019.

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Figure 1 3-month MA of YoY of the World Trade Volumes, Industrial Production and PMI 2015–2019 Aug. Souce: IMF (2019) [2]

Why the world trade volumes drop? IMF (2019) provides the following 2 explanations:

  1. Debt-ridden China causes a slowdown in demand

B. Debt-ridden China

It has been reported that Mainland China’s Debt-to-GDP ratio has been sharply increasing from not more than 100% to over 300% in the past decade. Corporate and household debts account mainly for the increase. It is quite common for corporates and households to cut their consumption and investment when they are deeply debt-ridden. The report says:

“A slowdown in demand in China, driven by needed regulatory efforts to rein in debt and exacerbated by the macroeconomic consequences of increased trade tensions.” [2]

C. The US-China Trade War

When the two biggest economies fight, the world stumbles. It is quite commonly accepted that the coming global recession is at least partly due to the US-China Trade War. The increase in tariff would normally result in either a switch of suppliers from other countries or a direct reduction in consumption. The report explains as follows:

“Weak business confidence amid growing tensions between the United States and China on trade and technology. As the reach of US tariffs and retaliation by trading partners has steadily broadened since January 2018, the cost of some intermediate inputs has risen, and uncertainty about future trade relationships has ratcheted up. Manufacturing firms have become more cautious about long-range spending and have held back on equipment and machinery purchases. This trend is most evident in the trade and global-value-chain-exposed economies of east Asia. In Germany and Japan, industrial production was recently lower than one year ago, while its growth slowed considerably in China and the United Kingdom and, to some extent, in the United States. The weakness appeared particularly pronounced in the production of capital goods.” [2]

Figure 2 shows the changes of Industrial Production of the 6 major economies, viz. the US, the UK and Germany, Japan, China and the Euro Area 4. Almost all of them show a downturn since 2018 and three of them (Germany, Japan, and the UK) are now in the negative zone. The chart does not quite match with the US-China Trade War theory as the US and China’s growth rates in industrial production are still in the positive zone, though at a decreasing rate. Yet, it requires many more studies to test the theory as world trade dynamics can be very complicated and the switch of purchasing may take a long time especially when capital-intensive manufacturing infrastructure has to be moved from one country to another.

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Figure 2 3-month MA of YoY of the Industrial Production of 6 economies, 2015–2019Aug. Source: IMF (2019) [2]

D. Changes of Standards and Tax Incentives

IMF (2019) explains car sales reduction by the changes in emission standards and the expiry of tax incentives. I think this logic can be extended to many other industries. Due to many unprecedented events and innovations, such as Global Warming, Artificial Intelligence and Apps of Mobile Phones, etc., we are encountering paradigm shifts in many industrial standards, besides emission standards of the automobile, many products are at the verge of fading out, such as camera, stationeries, calculators, audio and video equipment, measuring equipment, etc. It is understandable that manufacturers of these traditional products would reasonably take a wait-and-see attitude and stop further machinery investment. IMF (2019) says:

“A sharp downturn in car production and sales, which saw global vehicle purchases decline by 3 percent in 2018. The automobile industry slump reflects both supply disruptions and demand influences — a drop in demand after the expiration of tax incentives in China; production lines adjusting to comply with new emission standards in the euro area (especially Germany) and China; and possible preference shifts as consumers adopt a wait-and-see attitude with technology and emission standards changing rapidly in many countries, as well as evolving car transportation and sharing options.” [2]

Figure 3 confirms the fact that global spending on Machinery and Equipment has stopped increasing. The growth rate drops from more than 5% in 2017 to 0% in 2019Q2. It takes time for manufacturers to adapt and switch their production lines from traditional products/standards to new products/standards.

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Figure 3 Global Spending on Durable Goods — Machinery and Equipment versus Consumer Durables

E. Contributions to Global Imports

Taking a more detailed look at the changes of the World Trade Volumes in the past 20 months, Figure 4 reveals a global reduction in imports, and China, East Asia and other EMDEs made the biggest drops, all from positives to negatives since 2019. The UK seems to be the only exception that changed from negative to positive. Why the reduction in imports

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Figure 4 Contributions of Global Imports of 6 Major Economies 2018–2019Jun. Source: IMF (2019) [2]

The contraction of China’s and East Asia’s imports is likely the combined negative effects of all the 3 reasons. It may not be easy to tackle when all the 3 factors interact in the same direction. For example, cutting interest rates is normally one of the monetary approaches to deal with a slowdown in demand, but when a country is debt-ridden, it may not be wise to further encourage more debts. Furthermore, many economies have already cut their interest rates down to almost zero, some of them have even had negative nominal interest rates in the bond markets. The interest rate of a country would also affect the strength of the currency. Let’s further discuss the global trends on the interest rate and exchange rate separately.


[1] Yiu, C.Y. (2019) Global Recession is Imminent, HK Government Launches Unorthodox Measures, Medium, Oct 20. https://medium.com/@edwardyiu/global-recession-is-imminent-hk-government-launches-unorthodox-measures-328be685de51

[2] IMF (2019) World Economic Outlook Report 2019. https://www.imf.org/en/Publications/WEO

ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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