Dark­en­ing clouds over­hang­ing eco­nomic ex­pan­sion

The Peterborough Examiner - - Business - JOSH BOAK AND JOE MCDON­ALD

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.

STEPHEN B. MOR­TON THE AS­SO­CI­ATED PRESS

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.

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