A Weakening Global Economy Calls for a Consensus on Sri Lanka’s Priorities

September 9, 2019        Reading Time: 4 minutes

A-Weakening-Global-Economy-Calls-for-a-Consensus-on-Sri-Lankas-Priorities Reading Time: 4 min read

Image Credits: Sarah Nichols/flickr

Ganeshan Wignaraja*

Global stock markets seem jittery once again. After substantial rallies during the first half of 2019, stock markets have given back much of their gains over the last two months. Against fears over a global recession, an intensifying trade war between the US and China, and an increased likelihood of a disorderly Brexit, stock markets plummeted in the US, Asia and Europe in August. Asian equities dropped by 4% during the month, whilst European and US equities were subject to a 1.8% decline.1

The above developments, alongside globally falling manufacturing outputs and rising public debt levels in emerging markets, have added to a shift towards less risky stocks and government securities. The critical policy questions facing us today are whether fears of another global recession are being overstated by international financial markets, and how vulnerable Sri Lanka is to such a challenging economic event.

Intensifying Global Economic Risks

There is little doubt that the global economy in September 2019 is experiencing a phase of slower growth beset by heightened risks. This is not a new phenomenon but rather a continuing shift to a new normal world economy that evolved from the global financial crisis of 2008-2009. To various degrees, advanced Western economies are experiencing what former US Secretary of the Treasury Larry Summers calls “secular stagnation” or a long-term economic slump.2 Chinese growth is also slowing faster than expected and could converge over time to levels seen in advanced economies. Indian growth has also slowed to a six-year low and some question whether its previously reported fast growth was properly measured in the first place.

These changes in the pattern of global growth largely reflect underlying structural factors like low investment, a shortage of labour due to an ageing population and disruptive technological change. Lower consumer confidence and high levels of household debt have contributed to waning demand. The tit-for-tat tariff escalation between the US and China, other countries’ global interconnectedness with these two superpowers, and the prospect of a disorderly Brexit have probably made matters worse for the fragile global economy.

That said, the world’s central banks and finance ministries are monitoring the situation closely, and still have some firepower for counter-cyclical monetary and fiscal policies. The Bank of Japan3 and European Central Bank4 recently confirmed that they would employ further monetary easing in an attempt to stimulate the economy should the need arise. The International Monetary Fund (IMF) and regional financial institutions are also gearing up. Whether there is scope for national action backed by international policy coordination on a scale seen during the 2008-2009 crisis remains an open question. The independence of central banks in the US and the UK seem to be under threat, with political leaders criticising their actions on interest rates and quantitative easing. At the same time, the IMF is in a leadership transition and it will take some time for a new head to come to grips with the institution.

Implications for Sri Lanka

The dark clouds hanging over the global economy are a mixed blessing for Sri Lanka, which was re-classified by the World Bank as an upper-middle income economy in 2019. On the one hand, it could spell more bad economic news for Sri Lanka which is still in recovery mode following the Easter Sunday bombings and downturn in the second half of 2019.5 As a small open economy and a foreign borrower, Sri Lanka is intricately linked to the global economy. A global recession economy shock and economic downturn could hit the country’s trade, tourism, and worker remittances. Inward foreign investment and domestic business confidence could also be affected. Financial markets and exchange rate volatility may affect the terms of foreign borrowing, external debt repayments and the capacity to import. Indeed 2019 and 2020 could see tough economic times for Sri Lanka.

On the other hand, some of the disruptions in the global economy and price reductions in Sri Lanka means that some new business opportunities could come the country’s way. For instance, the tourism sector could benefit from an influx of Chinese and Indian tourists seeking bargain-basement prices. Garment and tea exporters are currently under pressure from foreign buyers to reduce prices, and hence margins.

More generally, the silver lining for Sri Lanka is that an opportunity exists for a new economic agenda for inclusive growth after the cycle of Presidential and Parliamentary elections in 2019-2020. Sadly, there is no quick fix to the country’s underperforming economic growth and lack of competitiveness. An agenda for long-term growth and competitiveness would need to effectively manage macroeconomic imbalances and the debt overhang, whilst doing some house-keeping work on the trade and investment regime. Gradually tackling challenging areas such as reforms to the labour market, agriculture, and the public sector is also essential.

A Last Word

This may all sound like an overly gloomy economic outlook for Sri Lanka. Indeed, the near-term forecasts of economists are sometimes wrong. However, if one subscribes to the best case forecast of a mixed economic outlook for Sri Lanka in 2019 and 2020, then planning and consensus building for a new growth and competitiveness agenda should begin now. After all, the country’s economic prosperity depends on it.

Notes

1Bloomberg: Month-on-month market movements – August 2019 (Topix JPY: -3.4%, Nikkei 225 JPY: 3.8%, MSCI China HKD: -4.2%, MSCI Europe EUR: -1.8%, and S&P 500 USD: -1.8%)
2Summers, L. (2019). Secular Stagnation. [online] Larry Summers. Available at: http://larrysummers.com/category/secular-stagnation/ [Accessed 04 September 2019].
3Harding, R. (2019). BoJ holds rates but vows easing if global events hit economy. [online] Financial Times. Available at: https://www.ft.com/content/feed7d54-b276-11e9-8cb2-799a3a8cf37b [Accessed 04 September 2019].
4Elliott, L. (2019). ECB signals it will move to boost growth amid fears of low inflation. [online] The Guardian. Available at: https://www.theguardian.com/business/2019/jul/25/ecb-signals-it-will-move-to-boost-growth-amid-fears-of-low-inflation [Accessed 04 September 2019].
5Cassim, N. (2019). Easter Sunday attacks a setback but macro fundamentals not thrown- off track: CB Chief. [online] Daily FT. Available at: http://www.ft.lk/top-story/Easter-Sunday-attacks-a-setback-but-macro-fundamentals-not-thrown-off-track–CB-Chief/26-679789 [Accessed 04 September 2019].


*Dr. Ganeshan Wignaraja is the Executive Director of the Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKI). The opinions expressed in this piece are the author’s own and not the institutional views of LKI, and do not necessarily reflect the position of any other institution or individual with which the author is affiliated. This article was originally published in the Daily FT.

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