Depressing global forecasts

Latest reports about the world economy are quite depressing. The World Trade Organisation (WTO) on 27th September, 2016 reduced its global trade forecast, warning that anti-globalisation rhetoric and Brexit were pushing trade growth to its slowest pace since the financial crisis. As the trade deal between the US and the EU is facing a stiff opposition and Britain's exit from EU is causing jitters, global trade is now expected to expand by just 1.7 percent compared to April, 2016 projection of 2.8 percent and the expected swelling of 3.9 percent a year earlier. With expected global GDP growth of 2.2 percent in 2016, this year would also mark the slowest pace of output growth since the financial crisis of 2009. There was a possibility that growing anti-trade rhetoric would also be reflected in trade policy, creeping protectionism and financial volatility. The OECD had said earlier that Britain - world's fifth largest economy - was poised to take a major hit next year from its decision to leave the EU. According to the WTO, "the recent run of weak trade and economic growth suggests the need for a better understanding of changing global economic relationships."
The IMF was also not far behind in sounding the alarm bells. On the same day, it said that many countries of the world were battling disinflation. While central banks are struggling to beat back deflationary forces, governments also need to help them to succeed. According to the Fund, deflationary pressures in many countries are coming from abroad in the form of sinking prices of both commodities and manufactured goods. Weak inflation weakens the central banks' ability to use monetary policy to stimulate demand because interest rates are already very low, giving them little room to cut further. A protracted deflation can lead to costly deflationary cycles where weak demand and deflation reinforce each other and end up in increasing debt burdens and hindering economic activity and job creation. Central banks in most countries are now increasingly perceived to lack policy scope to reverse disinflation or reduction in the rate of inflation. However, on the whole, countries cannot afford to be complacent.
These grim scenarios by almost all the global institutions are of course very distressing and also point to the policy limitations to get out of this dismal situation. After the 2009 financial crisis, it was widely expected that the situation will be normal again after some time, most of the countries would be able to reverse deflationary trends and world trade and growth would resume an expansionary trend with some effort. Obviously, these expectations have not materialised largely due to the lack of cooperation between major world economies, increasing protectionism, depressed commodity prices and ongoing conflicts in many parts of the world. The year 2016 has witnessed the slowest pace of trade and output growth since 2009 and there are no bright prospects for the immediate future either. The worry is that if companies and people believe that the policymakers cannot halt the economies from sinking further into a deflationary spiral, consumers hold back their spending and companies tend to delay their investment plans, stalling the economy further. The IMF had warned the countries not to be complacent but it must realise that policy choices available to the authorities are extremely limited. While the interest rates in almost all the countries are already very low, even negative in certain cases, and central banks cannot throw the money through a helicopter, there is nothing more the central banks could do to revive demand. An expansionary fiscal policy could also be the answer but increasing debt burdens and moral hazard issue could be problems for adopting such a policy course. While all the major stakeholders, including the governments and major organisations of the world are rightly concerned about the present situation and issuing warnings to the countries, it should also not be forgotten that trade cycles are inherent part of market economies and nobody has so far come up with a perfect answer to remove this deficiency of the system.
Pakistan, being an open economy, is very much exposed and, as such, would bear the brunt of emerging exogenous shocks. Depression in world commodity prices has already forced the farmers to take to the streets with a view to winning concessions from the government which would have serious fiscal implications for the country. Home remittances could decline due to a lower demand of labour in the rest of the world. Demand for our exports and services would slacken further if economic activity in the importing countries continues to be sluggish. Foreign aid and assistance could dry up. All these factors would add to the pressure on the external sector of the economy. Hopefully, economic managers of the country would be fully aware of the unfolding situation and thinking about ways to confront the serious challenges lying ahead.