Darkening clouds overhanging economic expansion
WASHINGTON — After galloping along for the past two years, the global economy is showing signs of weakening, with the United States, China and Europe all facing the rising threat of a slowdown.
Few economists foresee an outright global recession within the next year. But the synchronized growth that powered most major economies since 2017 appears to be fading. The risks have been magnified by the trade war between the United States and China, the strife dividing Britain over an exit from the European Union and the Federal Reserve’s interest rate hikes.
It’s all been enough to contribute to a broad retreat in global stock markets. Counting Tuesday’s deep losses, U.S. stock indexes, once up around 10 per cent for the year, have surrendered all their 2018 gains.
The Fed is expected next month to raise its key short-term rate for the fourth time this year. The central bank’s rate hikes help control inflation. But they also make loans costlier for consumers and businesses. And for countries that borrowed in U.S. dollars, the Fed’s hikes make debts harder to bear.
“We can’t continue to grow this fast for much longer without risking inflation,” Adrian Cooper, chief executive of Oxford Economics, said of the still-solid U.S. economy. “That’s ultimately what the Fed is trying to achieve with its steady movement in interest rates. The skill is to do so in ways that don’t create a big downturn.”
The concerns have grown enough that Larry Kudlow, U.S. President Donald Trump’s top economic adviser, on Tuesday dismissed the worries roiling the markets.
“Recession is so far in the distance I can’t see it,” Kudlow told a group of reporters outside the White House. “Keep the faith. It’s a very strong economy.”
The collective growth of the world’s major economies in the past two years was broadly welcomed after a feeble recovery from the 2008 financial crises. Yet, few economists saw accelerated growth as sustainable — or even desirable — over several years.
The concern is that a prolonged global expansion could ignite inflation or speculative investing that would inevitably send vulnerable economies into a downturn. Compounding the challenge, the world’s economies are linked more than ever through trade, finance and investment — to the point that a rupture in one major nation tends to spread across the globe.
Oxford Economics predicts that the growth of the global economy, as measured by its gross domestic product, will slip from 3.1 per cent this year to 2.8 in 2019. Such a slowdown is enough to crimp corporate profits and business investment, Cooper said. Still, most American and European workers probably wouldn’t feel the pain, he said, in part because of a resilient job market and lower oil prices.
“2019 is still going to look pretty good — your job is going to be safe, and your wages are going to rise,” Cooper predicted while adding that he thinks the slowdown will worsen in 2020.
In the meantime, though, stock markets have endured waves of jittery selling as investors have tried to factor in a slowdown that could depress the growth of company profits.
“Financial markets have become a little more volatile and anxious of late, worried about slowing global growth, trade tensions, Brexit woes and concerns that the U.S. may not be able to sustain its current cyclical sweet spot,” said Josh Feinman, chief economist at Deutsche Asset Management.
Over the next two years, most forecasts suggest that U.S. growth, after cresting above 3 per cent this year — its best performance since 2005 — will weaken. Fed Chair Jerome Powell acknowledged in a speech last week that the strong worldwide growth of 2017 is in retreat.
“You see signs of a gradual slowdown,” Powell said.
Goldman Sachs foresees annual U.S. growth slowing to 1.75 per cent by the end of 2019. The predicted weakening stems, in part, from the front-loaded stimulus of the tax cuts Trump pushed through Congress. The boost from the tax overhaul is expected to wane by 2020.
One continuing threat for the U.S. economy is Trump’s trade war with China. The president has imposed a 10 per cent tax on $200 billion of Chinese goods — a tariff that’s set to escalate to 25 per cent in 2019. He’s also threatened to add tariffs on $250 billion more in Chinese goods.
A prolonged trade crisis would depress the global exchange of goods and, therefore, economic growth.
“Both countries appear to be far apart on the trade dispute and unwilling to back down at this point,” said Scott Anderson, chief economist at the Bank of the West.
After galloping along for the past two years, the global economy is showing signs of weakening, with the United States, China and Europe all facing the threat of a slowdown.