Article How central banks can prepare for the next recession

How central banks can prepare for the next recession

The next recession forecast remains unclear. Expert opinions differ on when it will come, but most agree that another recession will land within the next few years. British newspaper The Guardian has reported that growth will slow in economic powerhouses such as China and the United States in 2019. In the case of the latter, recent interest rate increases may contribute to a slow-down. On the global scale, the International Monetary Fund reported late last year that growth had plateaued at 3.7 percent.

Seemingly positive economic conditions, including low unemployment and increases in retail sales and industrial production, may indicate a recession as well. Similar patterns have been seen just before downturns in the past, blindsiding forecasters and the public.

That does not mean there is reason to panic. In October, The Economist noted that a shallow recession would not be unexpected after several boom years and also suggested that this downturn will not be as catastrophic as the last. Still, central banks would be prudent to begin preparing for this eventuality now before the inevitable decline takes shape.

Evaluate the strength of existing monetary policies

Critics argue that stimulus measures such as government spending and transfer payments tend to offer few long-term fixes that ensure economic growth. However, because central banks had to implement extreme monetary policies to cope with the last recession, government stabilizers of this kind may be needed, should there be another downturn. Some argue that after the interest rates were lowered, countries delayed the process of raising them again for too long, leaving fewer options for addressing the next recession.

The Financial Times reports that "central bank balance sheets are still bloated," and there may be little room for further expansion. On the positive side, the publication has also suggested that the United States stands poised to navigate the coming recession with less economic disruption than in previous cases, which may decrease the severity of any downturn at the global level.

Diversifying reserves could also reduce the negative impact of a recession. Some emerging economies have been aggressively buying gold in order to reduce their dependency on the U.S. dollar. The Brookings Institute notes Poland's approach to diversifying its export strategies — including fiscal stimulus and depreciation of the currency — helped it escape the 2008 crash relatively unscathed compared to its European neighbors. This example could offer a way forward for other central banks.

The primary concern currently is interest rates, which could trigger a recession if they continue to increase. Given the decisions of the U.S. Federal Reserve tend to influence global regulators, consistently raising these rates could reduce growth around the world and usher in a new recession. However, the Fed has said it will slow rate increases for now — a move European regulators already made in their own countries in response to Italy's recession.

Develop automatic protections

Central banks can also implement contingency strategies that involve distributing money to individual citizens to help them weather the recession, and keep the economy moving. Protections such as unemployment benefits and income tax adjustments exist to help people cope with a downturn, and these programs will likely be put to use in the coming years.

Still, these stabilizers may not be enough to sustain the economy during a prolonged recession, even with government-authorized benefit extensions. Central banks should, therefore, devise a system in which such stabilizing programs will go into effect automatically based on certain economic preconditions to ensure that a baseline of support is granted immediately.

Use predictive analysis

Technology will play a critical role in mitigating the negative effects of the next recession. Centralized management platforms enable banks to monitor activity across markets and assess commodities, foreign exchange and risk factors in real time. Most importantly, a centralized view allows decision-makers and analysts to leverage their data effectively and anticipate economic downturns well before they happen.

A comprehensive view aided by predictive analysis will allow decision-makers to discern how market activities across the world may reverberate back on their own local economies. Deriving practical insights from data is crucial when planning for economic disruptions, and the availability of this key resource will likely determine how well countries are able to weather the next recession.

Consider quantitative easing policies

Central banks could also look to develop their quantitative easing policies, according to The Economist. Quantitative easing is controversial, and many critics deride the tactic because it decreases the value of currency and can increase inflation. It also does not guarantee a bump in credit for consumers, as banks can choose to hold onto the influx of cash rather than issue more lines of credit.

Proponents of the practice, on the other hand, note that quantitative easing did in fact lift the economy out of the last recession and help stabilize the market. Also, contrary to skeptics' fears that quantitative easing would become a permanent fixture in the economy, the Federal Reserve did eventually roll back these measures.

The timing of the next global recession will likely become more clear within the next year or two, but central banks should act now to create policies and protocols that will mitigate the negative effects and facilitate a quick and effective economic recovery.

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