ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Impending Global Recession

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There is an emerging consensus among the major global banks that the global economy has entered the last stages of the market cycle (booms and busts) which will continue till 2020. There have been certain benign assumptions about how inflation will turn out to be in the future and how slower growth can have adverse impacts on the overall economy. The banks have put forward a theory which is filled with more of optimism and less of caution because of several reasons. The assumption is that the impact of labour market tightening on wage growth, mainly in the developed markets, will be very limited and hence the cost-push inflation will not jeopardise the situation. Besides, the European Central Bank (ECB) has also focused on a calibrated approach on the interest rate hikes. The fear of a global growth slowdown due to the inability of the United States (US) to maintain its current scale of exports and imports also remains muted. This is important due to the US’s position of being one of the major contributors to the global growth. Finally, the global political uncertainty is largely undergoing a smooth transition, keeping aside a few occasional hiccups displayed by the ongoing Brexit negotiations.

All the points cited above majorly discount the over-indebtedness in the non-financial corporate sector. The fundamental problem that this over-leveraged sector faces is its inability to pay back the debt when the economy slows down or the interest rates rise. Events such as General Electric and General Motors laying off employees in order to generate higher cash flows are germane examples that throw light on the issue. The data tells us that the global non-financial corporate debt, in terms of the corporate bonds outstanding, has increased from $2.4 trillion in 2000 to $11.7 trillion in 2017 (December 2017). Out of this, $4.8 trillion alone is from the US which makes it imperative to understand the risks surrounding this sector. The US will have $2.4 trillion of its debt maturing in the coming four years and will call for a tsunami of repayments (2019–22). In this context, I will focus on how the risk of defaults in payments could materialise.

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Updated On : 15th Feb, 2019

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