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DAILY NEWS ANALYSIS

  • 03 September, 2019

  • Min Read

An intensifying whimper that has begun to take a global toll

GS-III: An intensifying whimper that has begun to take a global toll

News

News show signs of another economic crisis and stock market decline.

Background

  • The economic situation around the world is rather grim. From synchronized global growth in the first half of 2017, we are now in the midst of a synchronized slowdown exacerbated by the US-China trade war.
  • Merval Stock Market dropped 48% in a single day and the peso has fallen by 85% over the last three years.
  • Many countries in Europe have been or have now fallen into negative interest rates, with Switzerland, Denmark, Sweden, and the Eurozone all with minus signs on interest rates.
  • Countries that account for almost a quarter of total global output now have central banks with policy rates set below zero.
  • The amount of “sub-zero” debt, that is debt with negative interest rates, is at an all-time high of $15 trillion.
  • Europe’s slowdown is fully demonstrated by the entire German yield curve going below zero last month.

What is the issue

  • Large parts of the world are starting from negative interest rates.
  • This means that monetary policy stimulus as a method to combat the slowdown is rendered largely ineffective, and central banks in Europe, Japan, and the US may have to once again increase the size of their balance sheets.
  • The only other choice is to use fiscal expansion to counter the slowdown.
  • A third choice is to take the impact of the slowdown without too much of a cushion, but democracies are ill-equipped to deal with the negative political reaction to prolonged recessions.

Way Forward

  • India must use any window of opportunity to undertake any structural reforms that present themselves.
  • Low oil prices, good global growth, and moderate inflation are such windows.
  • India’s medium-term economic growth is supported by favourable demographics.
  • In the short-term government may not undertake deep structural reforms that may impact growth and employment.

Source: Live Mint


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