Warning signs show
Global economy slows, recession risk hangs in the balance
LONDON — Economic growth around the world has slowed to a crawl but (so far) there are few signs of the second-round effects on jobs, income and spending that would turn a significant slowdown into an outright recession.
The International Monetary Fund has forecast global output will increase by just 3.0% this year, the slowest expansion since the recession of 2008/09 (“World economic outlook”, IMF, Oct. 15).
The Fund expects growth to accelerate slightly to 3.4% next year but only because of a slightly better performance in economies such as Turkey and Argentina currently under severe strain.
The slowdown has been synchronized globally and centered on manufacturing, investment and trade as rising tariffs and increased policy uncertainty have hit business confidence and consumer spending on motor vehicles.
In recent months, there have been signs the slowdown has spread from the more volatile manufacturing sector to infect more stable services industries, raising the threat of a recession to its highest level for a decade.
So far, however, there have been few of the second-round effects on employment, incomes and consumer spending that would turn a slowdown into a more serious downturn.
U.S. manufacturers reported production excluding motor vehicles and parts was down 0.7% in the three months between July and September compared with a year earlier, the worst performance since late 2016.
But the number of employees in manufacturing was still up 1.0% compared with the same period a year earlier, while aggregate hours worked were down but only by 0.3% (“Current employment statistics”, BLS, Oct. 4).
For the whole U.S. economy, personal incomes minus transfer payments from the government such as social security were still up by 2.8% in real terms in the three months from June to August compared with a year earlier.
Real consumer expenditures were also up 2.5% in June-august compared with the same period in 2018, down from 3.5% growth a year earlier but well above recession levels (“Personal income and outlays”, BEA, Sept. 27).
The U.S. slowdown is real and significant, but unless it starts to translate into job losses and reduced income growth it is unlikely to become a full-blown recession.
Growth has been hit even harder in the rest of the world, especially in economies with a heavy exposure to international trade such as China and Germany.
But there have been few reports of widespread job losses, which suggests the slowdown is showing only first-round effects so far.
POLICY RESPONSE
Recessions, like booms, are caused when the change in economic activity is amplified and becomes self-reinforcing through second-round positive feedback effects.
The challenge for policymakers is to create a firebreak to prevent the slowdown from becoming a slump, and there are signs that the risks have been recognized at the top level.
In response to growing fears of recession and signs of ebbing growth, the Federal Reserve has already cut interest rates by 50 basis points since July, with other major central banks also taking steps to ease financial conditions.
Prodded by the deteriorating economic outlook, trade negotiators from the United States and China have also displayed greater flexibility and claim to be making progress towards a phased agreement.