Spotlight: Econ Op-eds in Summary (Week ended 21st August '19)
1. Emerging signals of a US recession
By: Prof. Lalith Samarakoon
· Inverted yield curves on US government bonds have signalled upcoming recessions in the US economy in the past. During a yield curve inversion, uncertainty causes investors to expect more returns in the short-term than in the long-term. Recent inversions of the US 2-year and 10-year are causing similar worries of a US recession again.
· Such a recession is likely to negatively impact the already struggling Sri Lankan economy. Lower demand for exports is likely to be a key result of a global recession, which lowers domestic economic activity leading to a contraction in imports as well. Tourism inflows and foreign remittances are expected to further decline, while the budget deficit is likely to expand via higher public investments to offset subdued FDI flows.
· However, it is possible that emerging markets perform better than developed markets. This could improve the flow of capital to countries such as Sri Lanka, lowering borrowing costs. Such a situation could also cause strength in the rupee’s value. However, any positive effects will remain dependent on Sri Lanka’s political stability and policy certainty.
2. Monetary policy changes around the world and implications for Sri Lanka
By: Prof. Lalith Samarakoon
· The Fed lowered its interest rates in July after almost 11 years. The act was induced by an expectation of an economic slowdown and a lower inflation. The rate cut was made in the hopes of giving a boost to a worsening economic landscape.
· Given the negative global economic landscape, many economies including Sri Lanka followed suit and lowered their interest rates, which critics say could ultimately result in asset price bubbles. It is expected that the Fed will move for a further rate cut during this year. However, a positive scenario is also not out of reach if the US-China trade war were to end.
· On the other hand, if the rate cuts continue, the dollar is expected to fall. This means that the rupee will be more stable and supportive of foreign currency flow to the country. The low interest rates would also mean that Sri Lanka will be able to borrow at lower rates in international markets. If the economic landscape improves, Sri Lanka will benefit from improved demand for its exports.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekara & Asel Hettiarachchi)
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