How to prepare for the next global recession | The Economist

We focused on this now because it's been a decade since the global recession of

2008-2009 and some interesting and and worrying vulnerabilities are also popping up at the moment

In 2008 and 2009

The dominoes were really set up for quite a nasty financial and economic crisis this time

The economic vulnerabilities aren't quite as large

They're large enough that we could see a slowdown in GDP growth and a slowdown in trade and things of that nature

the real risk, is that our lack of preparedness and

the the lack of room for global cooperation

Will turn what starts as kind of a minor downturn into something much larger and much more difficult to deal with sometime the next year

or two

The last big global downturn began in the United States with the collapse of the housing bubble in the financial sector there

next time the trouble is much more likely to start elsewhere and perhaps

In the emerging world. Emerging economies are a much larger share of global output than they used to be

They've also gone on something of a borrowing binge over the last ten years, which means that they could be due for a reckoning

There are also reasons to be concerned about

the euro area and in particular Italy which has an enormous public debt problem and

where markets have been feeling a bit jittery about their ability to pay that back and that could relaunch the euro area debt crisis that

We saw about a half decade ago

The tools government's normally used to fight a recession won't be available in the same way that they normally are the next time around

Interest rates will be very low and so we normally rely on central banks to do interest rate cutting to perk up

Spending break up growth and they're not going to be able to do that. So pretty quickly

They're gonna have to turn to less tested methods money printing to buy bonds

Quantitative easing was something that was used last time that's going to be used again

But that works in a much more uncertain way and is much more politically contentious than some of the tools that are ordinarily used

Within countries the problem is that government is much more polarized across the world

You have many more populist parties nationalist parties and it's going to be very hard to reach the agreement. That's

Necessary to launch big spinning programs and of that nature, then you also have disagreements across countries

Which means that it's much more likely you have

Contentious policies tariffs that go up currency wars things of that nature as countries struggle to deal with the next downturn

Ideally governments would be taking some steps right now to get ready for the next recession

They should be changing their central bank policy targets

What we've learned is that a low inflation target doesn't give central bank's enough room to fight recessions before interest rates fall to zero

They should also be getting their budgets ready, which means preparing

to include measures that will increase spending automatically when the economy weakens in the future so that they don't have to have to have

fights in Parliament about whether or not to expand spending when the time comes but then most important of all I think governments need to

Coordinate their responses with each other that makes it much more likely that we don't enter a scenario like we did in the 1930s

When tariff barriers went up when there were currency wars and competitive devaluations

and when ultimately that led to some pretty significant and nasty geopolitical tension