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Two Signals that Indicate a 2020 World RecessionUS-China trade war and U.S.A.’s reversal interest rate
Byeon Sae-eun, Junior reporter | 승인 2019.12.11 21:25

 Recently, the negative outlook for a 2020 world recession spread around the world. In September 2019, Fitch Ratings1) downgraded the growth rate of countries around the world because of the outlook for a recession. Paul Krugman who was awarded Nobel Memorial Prize in Economic Sciences in 2008, and other economic experts see the decline in manufacturing investment resulting from the US-China trade war and the U.S.A.’s reversal on interest rates as the main starting point of 2020 world recession.


 In May 2018, the US-China trade war started when the President of U.S.A., Donald Trump, imposed the tariffs on Chinese steel and aluminum imports. After a year and a half, it is still in force and has spread to other countries. As a result, global investors have had an awareness that the stock market is unstable and have cut back on investment. In reality, the investment growth rate of the Chinese manufacturing industry decreased from 9.5 percent in 2018 to 3.5 percent in 2019. The U.S.A. investment growth rate also decreased to a minus percentage. As a consequence, other countries that exported intermediary goods to U.S.A. and China have reduced their facilities, which made people believe that the world recession has started.

 

 Not only has the US-China trade war caused problems, but the U.S.A.’s reversal on interest rates created the fear of recession in people. In August 2019, the U.S. 10 year treasury bond2) interest rate (1.611%) was lower than two year treasury bond interest rate (1.614%). The long-term interest rate has a higher risk than the short-term interest rate, so, generally it was higher than short-term interest rate.. However, if a long-term economic slowdown is expected, investors tend to invest the long-term safety bonds. This led people to invest in the relatively safe bonds, U.S. long-term treasury bond. The U.S.A. reduced the long-term interest rates because of an increase in the U.S. long-term bond demand. In the past, after a reversal of U.S. treasury bond interest rates, a world recession followed.


 United States Department of the Treasury(USDT) said that the US-China trade war is less relevant to the world recession than people are thinking. The International Finance Center and other economists said that with the U.S.A.’s quantitative easing3) and an aging population, along with other factors, caused the U.S.A.’s reversal interest rate. Nevertheless, in order to get rid of the fear of 2020 world recession, Europe, China, and other countries try to lower the interest rates for long-term economic stability, and consider other economic revival stimuli.

 

1) One of the “Big Three (credit rating agencies)”
2) A government debt security that earns interest until maturity, at which point the owner is also paid a par amount equal to the principal
3) A monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to inject liquidity directly into the economy

Byeon Sae-eun, Junior reporter  saeilot99@konkuk.ac.kr

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