INTERVIEW Trade feuds may trigger global recession

Antonio Fatas, an economics professor at INSEAD

This is the first in a series of interviews with global economists to see how ongoing trade disputes will unfold and to analyze their implications for the Korean economy ― ED.

By Lee Kyung-min

Korea should brace for a global recession triggered by the escalating trade dispute between the U.S. and China, a Singapore-based global economist said Friday.

He called on the Korean government to introduce expansionary fiscal policies preemptively to minimize the impact of the recession, which he expects will arrive by the end of this year.

“The global economy ― the U.S. economy in particular ― has been doing well so far,” Antonio Fatas, an economics professor at INSEAD, said. “I do not expect a sudden decrease in growth rates but a slowdown that potentially turns into something more negative by the end of 2019 or next year; potentially a recession.”

Given the current global environment, Fatas said a synchronized slowdown and very likely a global recession are the most likely scenarios.

The gloomy judgment comes after the drawn-out feud between the world's two largest economies has developed into a fully-fledged currency war.

The U.S. designated China a “currency manipulator” on Monday (local time), a decision that followed what the United States considers to be deliberate inaction that led to China's currency dropping below 7 yuan per dollar.

The veteran economist said the world is heading to an escalation of trade conflict and increased tension in currency markets.

“The depreciation of the Chinese yuan and the U.S. Treasury declaration of China as a currency manipulator is a signal of other things to come,” Fatas said. “This is not just uncertainty, it is a confirmation that we are in the middle of a trade war and a currency war between the two countries.”

Fatas believes Korea's export-reliant economy stands to suffer as the two countries are its top trading partners.

“While this is not directly targeted at Korea, the openness of its economy and dependence on the region means that it cannot escape the negative effects,” he said. “But Korea did well during the last financial crisis. It all depends on how each of its trade partners do and how the government reacts to the slowdown.”

In his view, Korea may see some foreign capital outflow, but this is not the biggest problem.

“The biggest risk is the beginning of a global recession,” Fatas said. “If all this is not enough, the possibility of a no-deal Brexit on Oct. 31 and the additional geopolitical risks, such as Iran, put the global economy on a very risky path. A recession can be avoided but it would require luck and the best possible economic policies. Both are unlikely.”

Apart from the U.S.-China feud, a recently emerging conflict between Korea and Japan will add to the global uncertainty, which Fatas said could have bigger implications for the global economy in the long run.

“The reality is that the economic, trade and political regime has changed dramatically over the last two years,” he said. “Companies might have to rethink their global supply chains given that now they understand that the possibility of disruptions is real. Geopolitics matters more than ever.”

Proper and timely use of fiscal policies will be the best tools for the government to weather the adverse economic developments, Fatas said.

“The best advice is to be ready to use fiscal policy to counteract the effects of a growth slowdown,” he said. “The government has lots of room to do that and this will be the most effective tool.”