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US-China trade war

Mains- GS-2-International Relations, Mains-GS-3-Economic Development

A recent report by Morgan Stanley warns of a slowdown in global economic growth in the near future.

What did the report say?

1. The continuation of the US-China Trade War will lead to a fall in global economic growth.

2. The World Economy could enter into a recession within the next three quarters.

When did the last Economic slowdown happen?

1. The last massive slowdown in the global economy happened in the wake of the great financial crisis of 2008 and continued till 2010.

2. This was due to the financial crisis in the US economy after the sub-prime crisis in the domestic economy.

3. The Crisis had minimal impact on the Indian Economy.

How is a  recession defined?

1. In an economy, a recession happens when output declines for two successive quarters that is, six months.

2. For a global recession, IMF looks at other factors like employment, demand for goods, etc apart from weakness in the growth rate.

3. The long-term global growth average is 3.5 percent. The recession threshold is 2.5 percent.

Why did this situation emerge again?

1. Rising trade tensions between the US and China is the primary reason.

2. The imposition of higher tariff on imports from China by the US and countermeasures taken by China have negatively affected the global economy.

3. Other factors include the all-round global uncertainty, caused by Brexit and geopolitical tensions in West Asia, and between the US and North Korea.

Where does the Currency Manipulation figure in this?

1. The US has declared China a “currency manipulator”.

2. The US accuses China of deliberately weakening the yuan to make Chinese exports to the US more attractive and undercut the effect of increased tariffs.

Which are the other issues associated with this?

1. Two-thirds of the goods being lined up for increased tariffs are consumer goods.

2. Higher tariffs will reduce demand and also hit business confidence.

3. The latest US tariffs and similar countermeasures by China could start a negative cycle.

4. Businesses investment will reduce due to lower demand for consumer goods.

5. Reduced capital investment would reflect in fewer jobs leading to reduced wages and eventually lower aggregate demand in the world.

6. Central banks around the world are cutting interest rates thereby supporting the global economic activity.

7. Ideally, the global economy should not risk reaching a recession at a time when the monetary policy is already loose.

8. The trade tensions and uncertainty is negating the positives that a cheap money policy could provide to the world economy.

Source: Indian Express