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The world economy is not in crisis, but it is still vulnerable

NEW YORK. Fear of impending recession, which led to severe turbulence in financial markets in late 2018 and early 2019, has subsided somewhat.

It's a good news. Bad news is all that episode of fear revealed.

For most of 2018, the world economy seemed to be finally coming out of the quagmire, in which it was stagnant for a decade after the great recession and the global financial crisis. However, the era of constant low growth, low inflation and low interest rates has not yet ended.

The European Central Bank said on January 24 that “the growth rate in the short term is likely to be weaker than previously expected,” and the Bank of Japan decided to maintain its stimulus policy regarding possible risks to its growth. In the United States, the Federal Reserve will hold a meeting in the next few days, after which it is likely that it will decide to leave the interest rate unchanged.

Thus, even though the world economy has shown some promising signs of viability throughout most of last year, the problems that have affected it over the decade still exist; among these are the aging of the labor force in many of the most important economies, very low productivity growth and overcapacity and global savings, as well as a shortage of demand throughout the world.

These factors predict a dangerous time: since growth rates are low, it is easier for economies to fall into recession, and given low interest rates, central banks will have less reliable tools to reduce them. the effects of slowing down.

“This shows that the forces that restrict many economies struggle much harder and more widely than many expected or believed,” said Roberto Perley, a partner at financial research firm Cornerstone Macro. “This is bad news for the perspectives of workers’ wages in many countries and for those who are looking forward to overcoming the growing trend of inequality that has been going on for several years. ”

As growth rates are low, it is easier for economies to fall into recession.

Keep in mind that markets in the last weeks of 2018 have collapsed largely due to fears that the US Federal Reserve will raise interest rates in greater proportion than the economy can withstand (for example, if the rate is higher, people tend to consume less and less likely to manage loans).

What tells us that the interest rate of 2.4 percent, that is, the level at which the rate in the United States remained after growth in December, is enough to leave the economy on the verge of collapse?

Now that the world economy relies heavily on incentives to achieve even small growth, we do not have much to mitigate the negative reaction to change. For example, in the case of the United States there is a greater vulnerability to the possibility of falling into recession due to several factors, such as the closure of the state administration, which ended on January 25 and lasted more than a month, or the possibility of a commercial war, like the one that was brewing with China.

Adam Posen, president of the Peterson Institute for International Economics, said that "if growth and investment look like this, when there is relatively weak fiscal and monetary policy, especially in the United States, this means that there is no solidity in the background."

“The situation can be much worse if the policy becomes more stringent, without the need for it,” he added. “In any case, it is alarming to think about what the world economy would be like if there were no macroeconomic support,” incentives for low interest rates and a deficit.

There is a risk of a negative feedback cycle: low growth in the last decade, which caused stagnation of income, could contribute to political problems in countries such as the United Kingdom, Italy and the United States. These problems, in turn, may create new risks of a disruptive event in the economy, as happened in Washington with the recent closure of the administration.

The world economy is not in crisis; that a small increase is better than no growth or reduction.

However, the obvious lesson of the past few months is that the forces that restrained the world economy for eleven years were not temporary: they did not disappear. As a result, the world is in a particularly vulnerable position to face bad luck or bad policies.

Thus, low global growth was not just a phase; This is a new reality that we must accept before each discussion and macroeconomic issue in the near future.

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