Trade clashes, slower growth test economies
Forums on 2 continents key on global financial jeopardy
WASHINGTON — As global leaders gather on two continents to take account of a darkening economic outlook, the challenges are multiplying.
Economies from the United States to the European Union to China are slowing, presenting a challenge for central bankers, whose tools are limited at a time when interest rates remain historically low in much of the world.
The International Monetary Fund and the World Bank have downgraded the outlook for worldwide growth. On Thursday, Moody’s Investors Service said it expects the global economy to expand 2.7% this year and next — down from 3.2% the previous two years. And it issued a warning: Get used to it.
“The new normal will likely continue for the next three to four years,” the credit rating agency said.
Barely a year after most of the world’s major countries were enjoying an unusual moment of shared prosperity, the global economy is at risk of returning to the rut it tumbled into after the financial crisis of 2007-2009.
Worse, solutions seem far from obvious. Interest rates are already ultra-low, and high government debt makes it politically problematic to cut taxes or pour money into new bridges, roads and other public-works projects.
“Our tools for fighting recession are no doubt more limited [than] in the past,” said Karen Dynan, an economist at Harvard University’s Kennedy School.
Concerns are rising just as central bankers are meeting in Jackson Hole, Wyo., and leaders of the Group of
Seven advanced economies gather this weekend in the resort town of Biarritz in southwestern France, where they will discuss the global economy. A spotlight will shine, in particular, on whatever message Federal Reserve Chairman Jerome Powell sends in a speech today in Jackson Hole.
While central bankers strive to be politically independent and avoid giving elected leaders advice, they have acknowledged that government policies are threatening growth.
The dour global outlook partly reflects President Donald Trump’s trade conflicts with China and other countries.
“The trade uncertainty is here to stay,” said Madhavi Bokil, senior credit officer at Moody’s.
Squeezed by tightening protectionism, global trade is likely to grow just 2.5% this year, its slowest pace in three years, the International Monetary Fund says. Manufacturers, whose fortunes are closely tied to trade, are struggling. JPMorgan’s global manufacturing index dropped in July for a third-straight month, hitting the lowest level since 2012.
Complicating matters is Trump’s criticism of the Fed. On Thursday, he needled the Fed over Germany’s low interest rates, suggesting that negative interest rates on German bonds were putting the United States at a disadvantage.
“Germany sells 30 year bonds offering negative yields,” Trump wrote on Twitter. “Germany competes with the USA. Our Federal Reserve does not allow us to do what we must do. They put us at a disadvantage against our competition. Strong Dollar, No Inflation! They move like quicksand. Fight or go home!”
Global political brinkmanship is adding to uncertainty just as factories around the world slow production and businesses hold off on investment, stoking fears of a more concerted slowdown.
“Important countries are not in good shape,” said Roberto Perli, head of global monetary policy research at Cornerstone Macro, who said there was a risk of a significant and protracted global slowdown with the potential for outright recessions in some nations, like Germany. “It started for largely cyclical reasons, but since then, other factors have intervened — trade, most importantly.”
The International Monetary Fund expects China’s economy, the world’s second-biggest, to grow 6.2% this year — the weakest since 1990 — and just 6% next year. Trump’s trade war is certainly a factor. The president has imposed tariffs on $250 billion in Chinese imports and is set to tax nearly $300 billion more before year’s end. China’s slowdown is also being orchestrated in part by officials in Beijing, who are trying to contain lending to control the country’s runaway debt.
And an economic chill in China sends shivers into the many countries — from copper-producing Chile to iron ore-making Australia — that feed Chinese factories with raw materials.
Then there’s Europe. In the 19 countries that use the euro currency, growth slowed to an anemic 0.2% in the second quarter from the quarter before. The eurozone, which maintains close trade ties with the U.S. and China, has been sideswiped by the collision between Trump and President Xi Jinping. What’s more, Trump has threatened to impose significant tariffs on European auto imports.
Even more than the tariffs themselves, uncertainty over whether the trade disputes will be resolved is chilling investment and purchasing. Despite cheap borrowing costs from central bank stimulus programs, investment in new plants is lagging — an ominous sign that bosses don’t foresee future prosperity.
In Europe’s usual economic powerhouse, Germany, the economy shrank 0.1% in the second quarter from the quarter before. If output should fall for a second-straight quarter, Germany would find itself on the verge of a recession.
Some of Germany’s troubles originate closer to home. Its major automakers have been compelled to sink billions into technology to meet stricter emissions tests, and some have endured delays in doing so. BMW lost money on its car business for the first time in a decade in the first quarter. Daimler posted its first net loss since 2009 in the second quarter.
Brexit is another risk for Europe. Prime Minister Boris Johnson says the U.K. will leave the 28-country European Union and its free-trade zone on Oct. 31, with or without a divorce deal. Not knowing what will happen is a nagging source of uncertainty.
Facing such risks, the European Central Bank has signaled that it could introduce new monetary stimulus plans as early as next month. As recently as December, the central bank had been confident enough in the European economy to halt a nearly four-year, $2.6 trillion bond purchase program. That optimism has vanished.
Meanwhile, the U.S. economy, now enjoying a record-breaking 10-year expansion, still shows resilience. American consumers, whose spending accounts for 70% of U.S. economic activity, have driven the growth.
Retail sales have risen sharply so far this year, with people shopping online and spending more at restaurants. Their savings rates are also the highest since 2012, which suggests that consumers aren’t necessarily stretching themselves too thin, according to the Commerce Department.
But manufacturing is slowing, and consumer confidence sank in August.
Trump’s tariffs loom over the U.S. economy. The import taxes he plans to impose on China on Sept. 1 and again on Dec. 15 are likely to hit ordinary Americans more than the earlier rounds of tariffs.
Already, companies are delaying investments because they don’t know where to put new factories, seek suppliers or find customers until they have a better idea where the trade disputes are going. “Uncertainty is high,” said Eric Lascelles, chief economist at RBC Global Asset Management. “Businesses everywhere are sitting on their hands.”
“All forecasts for the U.S. economy in the second half of this year and beyond are contingent on the trade war,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, concluded in a note Thursday.
Information for this article was contributed by Paul Wiseman, David McHugh and Josh Boak of The Associated Press and by Jeanna Smialek of The New York Times.