RSM UAE

RECESSION JITTERS ON A RISE - IS THERE REASON TO WORRY?

The global economy has been witnessing a slowdown lately. In general parlance, an economy is considered to be in a recession when it contracts for two quarters consecutively, reflecting in the GDP along with other factors like employment rate, per capita income, etc. While there may be a lot of factors resulting in the distress, the escalating US-China trade war has been considered to be a prime reason for ringing in the slowdown.  The Brexit drama over a deal or no deal along with central banks turning non-accommodative with respect to further interest rate reductions have also been cited as key factors for pulling the world into a possible recession.


The US-China Trade War

The new tariff policies of the US have imposed tariffs of more than $360 billion on Chinese goods, and in retaliation, China has imposed tariffs on around $110 billion of US products. But what led to this trade war between the two countries? Donald Trump’s America First policy coupled with his belief that slapping tariffs are the only way to balance the trade deficit was the trigger.

Trump’s tariff policies were a medium to encourage citizens to buy more of “American-made” products by artificially making the imported products costlier. China, considered to be the poster boy of all things wrong with global trade, felt the first brunt of the US attack. Europe and India have also been caught in crosshairs of the US policy to drive down imports. The result: global mayhem and loss of confidence as exporters do not know if there will be a buyer for their products and importers are unsure if it will be sustainable to import under the new tariff scheme. 

But other countries are not sitting idle. China’s tariff on US agricultural products has been in retaliation to the US policy. While the US President has always believed that China resorts to unfair trade practices and intellectual property theft, China has blamed the US of curbing its growth by imposing higher tariffs.

 The two countries have been in dialogue and a deal is expected soon. The Trump rollback on duties for Christmas shopping means that sanity is prevailing among his advisors. But the situation is tense as the Trump administration is legendary for flipping policy decisions.


Is the Recession Here?

The world is jeopardized by the anticipation of a recession hitting the economy anytime now. While the last time recession hit the global economy in 2008, this has been the longest expansion that the US (and the world by definition as the US is the biggest consumer economy) has seen after 1991.

Many economic indicators and surveys of economists indicate that we are heading for a major slowdown and possibly recession in 2020 and 2021.

 

The Quasi-Recession and the Middle-East

The ICAEW Economic Update of Q3 2019 sees the Middle East growing at 0.1% as compared to the 1.4% growth in the last year. The stock markets seemed to have read the writing on the wall, with all major indexes in the red for the year.

But is all lost?  The PMI (Purchasing Managers Index) Survey, a critical measure of economic health, was flashing green for the non-oil sector of both the UAE and Saudi Arabia. The UAE Q2 PMI averaged over 58, which is the highest average in over 4 years. This underlines the fact that the UAE government has been successful in steering the economy from over-dependence on oil revenues.


How To Cope with Any Recession?

We have substantial amounts of facts lining up to indicate that the bear is here. And even though we might not be hit with a recession, a slowdown is almost surely coming.

While there is nothing that can cancel out the effects of a recession completely, there sure are ways that can cushion-up the process of coping with recession and seeing it out.

  • Economic Diversification

Not keeping all eggs in one basket helps diversify the sources of revenue to hold up the economy. In the previous recession, when the majority of sectors suffered, trade and logistics helped UAE to hold up through the crisis. Thus, diversifying the economy helps countries to cushion themselves through the downturn in the economy. This is similarly true for your company as well. Ensuring that you are not overexposed to one geography or client/industry group is critical to ensure that the company does not face a death spiral because of a default by a customer group or an aggressive slowdown in demand from one country.

  • Regulated Trade Relations

 Free trade is in peril and this is a sad reality. Protectionism is increasing across the world. It thus makes sense to ensure that you are not overly dependent on exports or imports for your business. Develop a local market or tap alternate markets to create a buffer.

  • Discourage Aggressive Credit Uptake

Over expansion by taking on debt should be currently shunned in favor of a more conservative approach. With prices falling, this might seem a good time to pick up companies at a cheap price but this can be counter-intuitive as the prices might drop a lot lower.

During the recession, cash is king and hoarding on cash has only one drawback- lower returns, as you might not be optimized on a capital allocation basis. But the extra capital will make sure you are solvent when your competitors might be going belly up due to a mountain of unserviceable debt.


Conclusion

“When America sneezes, the rest of the world catches cold”. America has been on a growth spree for the last 10 years. This growth can’t extend forever. Economies are cyclical and it is logical that we are facing a slowdown. You cant evade the cycle but at the same time, a company can take proactive steps to ensure its emerges stronger out of the recession.

 

Feel free to consult RSM UAE  to discuss your economic concerns. RSM is one of the world’s leading audit, tax and advisory service network, recognized for innovative solutions across the globe.

 

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