Global econ­omy cools, still short of full re­cov­ery for tens of mil­lions

Tri-City Herald (Sunday) - - Depth - BY PETER S. GOOD­MAN

Only a few months ago, the world’s for­tunes ap­peared in­creas­ingly ro­bust. For the first time since the wealth-de­stroy­ing agony of the global fi­nan­cial cri­sis, ev­ery ma­jor econ­omy was grow­ing in uni­son.

So much for all that.

The global econ­omy is now pal­pa­bly weak­en­ing, even as most coun­tries are still grap­pling with the dam­age from that last down­turn. Many na­tions are mired in stag­na­tion or slid­ing that way. Oil prices are fall­ing and fac­tory or­ders are di­min­ish­ing, re­flect­ing slack­en­ing de­mand for goods. Com­pa­nies are warn­ing of dis­ap­point­ing prof­its, send­ing stock mar­kets into a fre­netic bout of sell­ing that re­in­forces the slow­down.

Ger­many and Ja­pan have both con­tracted in re­cent months. China is slow­ing more than ex­perts an­tic­i­pated. Even the United States, the world’s largest econ­omy, and oft-trum­peted stand­out per­former, is ex­pected to de­cel­er­ate next year as the stim­u­la­tive ef­fects of Pres­i­dent Don­ald Trump’s $1.5 tril­lion tax cut wear off, leav­ing huge pub­lic debts.

The rea­sons for this turn run from ris­ing in­ter­est rates de­liv­ered by the Fed­eral Re­serve and other cen­tral banks to the un­fold­ing trade war un­leashed by the Trump ad­min­is­tra­tion. The like­li­hood that Bri­tain’s tor­tur­ous exit from the Euro­pean Union will dam­age trade across the English Chan­nel has dis­cour­aged in­vest­ment.

None of this amounts to a scream­ing emer­gency, or even a pro­nounced drop in com­mer­cial ac­tiv­ity. The Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment – a think tank run by the world’s most ad­vanced na­tions – re­cently con­cluded that the global econ­omy would ex­pand by 3.5 per­cent next year, down from 3.7 per­cent this year.

Yet in declar­ing that “the global ex­pan­sion has peaked,” the brains at the OECD ef­fec­tively con­cluded that the cur­rent sit­u­a­tion is as good as it gets be­fore the next pause or down­turn. If this is in­deed the high­wa­ter mark of global pros­per­ity, that is likely to come as a shock to the tens of mil­lions of peo­ple who have yet to re­cover from the dev­as­ta­tion of the Great Re­ces­sion.

Though the slow­down ap­pears mild, it also holds the po­ten­tial to in­ten­sify the wide­spread sense of griev­ance roil­ing many so­ci­eties, con­tribut­ing to the

em­brace of pop­ulists with au­to­cratic im­pulses. In an age of lamen­ta­tion over eco­nomic in­jus­tice, and with po­lit­i­cal move­ments on the march de­cry­ing im­mi­grants as threats, weaker growth is likely to spur more con­flict. Slower growth is not go­ing to make any­one feel more se­cure about the prospect of robots re­plac­ing hu­man hands, or jobs shift­ing to lower-wage lands.

“It’s just go­ing to ex­ac­er­bate the ten­sions that have led to the so­cioe­co­nomic and po­lit­i­cal prob­lems we have seen in the United States and parts of Europe,” said Thomas A. Bernes, an econ­o­mist at the Cen­ter for In­ter­na­tional Gov­er­nance In­no­va­tion, a Cana­dian re­search in­sti­tu­tion. “Inequal­ity is go­ing to be­come even more pro­nounced.”

In Greece, Spain and Italy, the youth unem­ploy­ment rate is stuck above 30 per­cent. In Bri­tain, the typ­i­cal worker has not seen a pay raise in more than a decade, af­ter ac­count­ing for in­fla­tion. South Africa’s econ­omy is smaller to­day than it was in 2010, and now the coun­try is en­snared in re­ces­sion.

In the United States, the unem­ploy­ment rate has plunged to 3.7 per­cent, its low­est level since 1969. Yet so many peo­ple have given up look­ing for work that less than two-thirds of the work­ing age pop­u­la­tion was em­ployed as of Oc­to­ber, ac­cord­ing to the La­bor Depart­ment. That was a lower share than be­fore the 2008 fi­nan­cial cri­sis.

“We see a lost gen­er­a­tion,” said Swati Dhin­gra, an econ­o­mist at the Lon­don School of Eco­nomics. “There was al­ready wage stag­na­tion and pro­duc­tiv­ity stag­na­tion. The trade war has ex­ac­er­bated all of that.”

The biggest risk to global growth ap­pears to be that the trade war is, at least in part, work­ing as de­signed.

Trump has ex­co­ri­ated China as a mor­tal threat to Amer­i­can liveli­hoods, ac­cus­ing Bei­jing of sub­si­diz­ing ex­ports and steal­ing in­tel­lec­tual prop­erty. He has af­fixed tar­iffs on some $250 bil­lion in Chi­nese ex­ports in an ef­fort to pres­sure Bei­jing to change its ways.

This has pro­duced lit­tle change in China’s eco­nomic prac­tices. It has ac­tu­ally in­creased the U.S. trade deficit with China, con­trary to Trump’s stated aim.

But it has thrown sand in the gears of China’s in­dus­trial jug­ger­naut. As of Septem­ber, China’s rail freight us­age, bank lend­ing and elec­tri­cal con­sump­tion had in­creased about 9 per­cent com­pared with the pre­vi­ous year, down from a pace of more than 11 per­cent in Jan­uary.

China’s growth was al­ready slow­ing as its lead­ers seek to tran­si­tion from an econ­omy pow­ered by prodi­gious ex­ports, in en­ter­prises that have spewed pol­lu­tion, to­ward a cleaner fu­ture pro­pelled by do­mes­tic con­sump­tion. But the U.S. tar­iffs have prompted multi­na­tional com­pa­nies to shift or­ders from Chi­nese fac­to­ries to plants in other lands, from Viet­nam to Mex­ico. Un­cer­tainty over the fu­ture has post­poned some busi­ness.

“There’s now po­ten­tial for bad news on the trade front to trig­ger shifts in eq­uity mar­kets and a pull­back on in­vest­ment,” said Steven J. Davis, an in­ter­na­tional busi­ness ex­pert at the Univer­sity of Chicago Booth School of Busi­ness.

Given that China is the world’s sec­ond largest econ­omy, the con­se­quences of its slow­ing rip­ple out widely, help­ing ex­plain a pro­nounced drop in fac­tory or­ders in Ger­many. Amer­i­can farmers have suf­fered lost sales as China has re­sponded by slap­ping du­ties on im­ports, not least on soy­beans. Stock mar­kets and oil prices have plunged in part on fears that China will buy fewer goods.

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