Jan 27th 2020

 Global Economy Without a Cushion 

 

NEW HAVEN – With the benefit of full-year data, only now are we becoming aware of the danger the global economy narrowly avoided in 2019. According to the International Monetary Fund’s latest estimates, world GDP grew by just 2.9% last year – the weakest performance since the outright contraction in the depths of the global financial crisis in 2009 and far short of the 3.8% pace of post-crisis recovery over the 2010-18 period.

On the surface, 2.9% global growth doesn’t appear too shabby. But 40 years of perspective says otherwise. Since 1980, trend world GDP growth has averaged 3.5%. For any economy, including the world as a whole, the key to assessing growth implications can be found in deviations from the trend – a proxy for the so-called output gap. Last year’s shortfall from trend (0.6 percentage points) brought growth uncomfortably close to the widely accepted global recession threshold of approximately 2.5%.

Unlike individual economies, which normally contract in an outright recession, that is rarely the case for the world as a whole. We know from the IMF’s extensive coverage of the world economy, which consists of a broad cross-section of some 194 countries, that in a global recession about half of the world’s economies are typically contracting, while the other half are still expanding – albeit at a subdued pace. The global recession of a decade ago was a notable exception: by early 2009, fully three-quarters of the world’s economies were actually shrinking. That tipped the scales to a rare outright contraction in world GDP, the first such downturn in the overall global economy since the 1930s.

For global business-cycle analysts, the 2.5-3.5% growth band is considered the danger zone. When world output growth slips to the lower half of that range – as it did in 2019 – the risks of global recession need to be taken seriously. As is typically the case for official, or institutional, forecasts, the IMF is projecting a modest acceleration of annual world GDP growth in 2020 and 2021, to 3.3% and 3.4%, respectively. But as the physicist Niels Bohr once said, “Prediction is very difficult, especially if it is about the future.” Just ask the IMF, which has revised down six consecutive iterations of its global forecast. Obviously, there is no guarantee that its latest optimistic projection will be realized.

Downside risks are especially worrisome, because a 2.9% growth outcome for the world economy underscores the lack of a comfortable cushion in the event of a shock. As I noted recently, predicting shocks is a fool’s game. Yet the draconian measures that China is now taking to contain the lethal Wuhan coronavirus only serve to remind us that shocks are far more frequent than we care to think. A few weeks ago, it was the possibility of a hot war between the United States and Iran. And before that, there was the increasingly contentious US-China trade war.

The point is that below-trend global growth, especially when it moves into the lower half of the 2.5-3.5% range, is nearing its stall speed. That leaves the world much more susceptible to recession than it would otherwise be in a more vigorous environment of above-trend global growth.

The same message comes through loud and clear in gauging the risks to the global trade cycle – long the major engine of global growth in an increasingly integrated, supply-chain-linked world economy. The IMF’s latest assessment put global trade growth at just 1% in 2019 – its seventh consecutive downward revision. Indeed, last year was the weakest trade performance since the historic 10.4% plunge in 2009, which was the worst contraction since the early 1930s. Compared to the 5% average over the 2010-18 period, the slowdown of world trade growth to just 1% in 2019 is all the more alarming. In fact, it was the fourth-weakest year since 1980, and the three worse years – 1982, 2001, and 2009 – were all associated with global recessions.

Global trade growth has never recovered to its pre-crisis pace, a shortfall that has been the subject of intense debate in recent years. Initially thought to be a consequence of unusual weakness in business capital spending, there can be no ignoring the impact of protectionism following the start of the US-China trade conflict. Now that the two sides have agreed to a truce in the form of a “phase one” trade deal, there is hope that the trade prognosis will improve. Reflecting that hope, the IMF’s January update calls for a modest rebound to 3.3% average growth in world trade over the 2020-21 period. But with the average US tariff rate on Chinese imports likely to remain at about 19% after the accord is signed – more than six times the pre-trade-war rate of 3% – and with worrisome signs of escalating US-Europe trade tensions, this forecast, like those of the past several years, may turn out be wishful thinking.

All this bears critically on the precarious state of the global business cycle. Historically, the rapid expansion of cross-border trade has been an important part of the global growth cushion that shields the world economy from all-too-frequent shocks. From 1990 to 2008, annual growth in world trade was fully 82% faster than world GDP growth.

Now, however, reflecting the unusually sharp post-crisis slowdown in global trade growth, this cushion has shrunk dramatically, to just 13% over the 2010-19 period. With the world economy operating dangerously close to stall speed, the confluence of ever-present shocks and a sharply diminished trade cushion raises serious questions about financial markets’ increasingly optimistic view of global economic prospects.


Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China. 

Copyright: Project Syndicate, 2020.

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Dec 29th 2022
EXTRACTS: "On August 1, 1991, a little more than three weeks before Ukraine declared independence from the Soviet Union, US President George H.W. Bush arrived in Kyiv to discourage Ukrainians from doing it. In his notorious 'Chicken Kiev' speech in the Ukrainian parliament, Bush lectured the stunned MPs that independence was a recipe for 'suicidal nationalism', 'ethnic hatred', and 'Local despotism.' ----- ....the West’s reluctance to respect Ukraine’s desire for sovereignty was a bad omen, revealing a mindset among US and European leaders that paved the way to Russia’s full-scale invasion in February. ----- .... Western observers, ranging from Noam Chomsky to Henry Kissinger, blame the West for Russian President Vladimir Putin’s decision to invade, or have urged Western leaders to provide Putin a diplomatic off-ramp by compelling Ukraine to give up territory. Policymakers, too, seem to view Ukraine’s self-defense as a bigger problem than Russia’s genocidal aggression. ----- ..... despite the massive material and military support the West has provided to Ukraine, the fateful logic of appeasement lingers, because many Western leaders fear the consequences of Russia’s defeat more than the prospect of a defeated Ukraine. ----- This war is about the survival of Ukraine and the Ukrainian people. In the words of the Israeli leader Golda Meir, born in Kyiv, 'They say we must be dead. And we say we want to be alive. Between life and death, I don’t know of a compromise.' "
Dec 29th 2022
EXTRACT: "China’s flexible, blended, increasingly dynamic private sector could do all that and more. ----- Then came Xi Jinping. "
Dec 29th 2022
EXTRACTS: "For a few years in the late 2010s, it seemed to be only a matter of time before China would replace the US as the world’s largest economy and overwhelmingly dominant technological superpower. Then came the COVID-19 outbreak in Wuhan in late 2019. " ---- "How could China’s seemingly all-powerful autocrat understand so little about the social contract on which his power rests? For all its difficulties, liberal democracy – with its transparency and self-imposed limits – has once again proved more efficient and resilient than autocracy. Accountability to the people and the rule of law is not a weakness; it is a decisive source of strength. Where Xi sees a cacophony of clashing opinions and subversive free expression, the West sees a flexible and self-correcting form of collective intelligence. The results speak for themselves."
Dec 12th 2022
EXTRACTS: "Next time you’re in Ukraine’s capital, Kyiv, don’t bother looking for Dostoevsky Street. It’s been renamed: it’s now Andy Warhol Street. ..... because many Ukrainians regard Andy as Ukrainian. Was he? The evidence is mixed." ---- "Warhol remained a committed Greek Catholic all his life. He regularly prayed, both at home and in church, and frequently attended Sunday Mass. His bedside table contained a crucifix, a Christ statuette, and a prayer book. After he died on February 22, 1987, he was buried in St. John the Divine Byzantine Catholic Cemetery, some twenty miles south of Pittsburgh, in a simple grave next to his parents." ---- "When it comes to objective cultural affiliation or subjective ethnic identification, the United States—with its diverse Slavic heritages—has the greatest claim on Warhol and his art."
Dec 12th 2022
EXTRACT: "Cellular agriculture provides an alternative, and could be one of this century’s most promising technological advancements. Sometimes called “lab-grown food”, the process involves growing animal products from real animal cells, rather than growing actual animals. If growing meat or milk from animal cells sounds strange or icky to you, let’s put this into perspective. Imagine a brewery or cheese factory: a sterile facility filled with metal vats, producing large volumes of beer or cheese, and using a variety of technologies to mix, ferment, clean and monitor the process. Swap the barley or milk for animal cells and this same facility becomes a sustainable and efficient producer of dairy or meat products."
Dec 5th 2022
EXTRACT: "After a decade of unconstrained growth – when it seemed that a new billionaire was minted every day – the tech industry has finally hit a rough patch. Elon Musk’s erratic behavior following his takeover of Twitter has left the financially leveraged platform in a precarious state. The crypto exchange FTX’s sudden implosion has vaporized a business that was recently valued at $32 billion, taking many other crypto firms with it. Meta (Facebook) is laying off 11,000 people, 13% of its workforce, and Amazon is shedding 10,000. What are we supposed to make of these setbacks? Are they isolated incidents, or signs of structural change?"
Dec 3rd 2022
EXTRACT: "Just looking at explicit debts, the figures are staggering. Globally, total private- and public-sector debt as a share of GDP rose from 200% in 1999 to 350% in 2021. The ratio is now 420% across advanced economies, and 330% in China. In the United States, it is 420%, which is higher than during the Great Depression and after World War II."
Dec 3rd 2022
EXTRACT: "The Conservative leadership must stand up to the party’s extremists, and it must do so sooner rather than later. If moderates cannot defeat the hardliners by the next election, and the outcome turns out to be as bad for the Tories as recent polls suggest, they will find they have the same fight on their hands in opposition. --- Conservatives must never underestimate the importance of their moderate supporters. If the Party continues to disregard centrists whenever the Brexiteer right stamps its feet, it may find itself out of power for a long time to come."
Nov 24th 2022
EXTRACT: "....young voters did reach the polls they voted overwhelmingly for Democrat candidates across the country. According to reports, 63% of 18- to 29- year olds voted Democrat and 35% voted Republican in the House of Representatives elections. Voters between 30 and 44 split their vote between the two parties, while older voters tended to vote Republican."
Nov 24th 2022
Nouriel Roubini: "Central banks are in both a stagflation trap and a debt trap. Amid negative aggregate supply shocks that reduce growth and increase inflation, they are damned if they do and damned if they don’t. If they increase interest rates enough to bring inflation down to 2%, they will cause a severe economic hard landing. And if they don’t – attempting instead to protect growth and jobs – they will be left increasingly far behind the curve, leading to a de-anchoring of inflation expectations and a wage-price spiral. Very high debt ratios (both private and public) complicate the dilemma further. Raising interest rates enough to crush inflation causes not only an economic crash, but also a financial crash, with highly leveraged private and public debtors facing severe distress. The resulting financial turmoil that intensifies the recession, creating a vicious cycle of deepening recession and escalating financial pain and debt distress. In these circumstances, central banks will blink. They will wimp out in the fight against inflation, in an effort to avoid an economic and financial crash. But that will lead to a higher permanent inflation rate, while only postponing the arrival of stagflation and debt crises. In other words, central banks in the United States, Europe, and other advanced economies have only bad options."
Nov 13th 2022
EXTRACTS: "Today’s autocrats wear staid business suits and pretend to be democrats, and that has been sufficient to grant them access to high-level meetings in Davos or at the G20, where they actively recruit former Western politicians, lawyers, public-relations consultants, and think tanks to make their case in the West." ---- "....whatever the weaknesses of Western democracies, they still command a degree of soft power that their autocratic competitors could only dream of. Democracy remains popular around the world – among citizens of both democratic and nondemocratic countries. That is why modern dictators pretend to be democrats." ---- "....there is no shortage of criticism about how the US and Europe function. But that itself is a product of the press freedom and political opposition that one can find only in democracies. But actions speak louder than words: Immigrants from around the world are eager to come to Europe or America, whereas few are trying to get into Russia or China."
Nov 9th 2022
EXTRACT: "In conventional macroeconomics, an economy’s longer-term growth potential is determined by the sum of labor-force and productivity growth. If one of those factors slows, the other must accelerate. Otherwise, long-term growth suffers.  China is in serious trouble on both fronts. An unsustainable one-child family-planning policy –subsequently changed to a two- and now three-child policy – means that the working-age population is declining, and Xi’s speech at the 20th Party Congress suggested that already-strong productivity headwinds are likely to intensify. "
Nov 1st 2022
EXTRACTS: "First and most obvious – it has happened before. And in an historical sense, it has happened relatively recently, with the collapse of the USSR in 1991 rightly considered a seismic event in world politics. The rub is that nobody predicted the end of the USSR either. In fact, it was confidently assumed in the West that Mikhail Gorbachev would go on ruling the Soviet Union, until the hard-line coup that failed to topple him (but left him mortally wounded in a political sense) made that view obviously redundant." ---- "So is it speculative to talk about a future Russian collapse? Yes. Is there evidence it is imminent? No. But in many ways that’s the problem: when authoritarian regimes implode, they tend to do so very quickly, and with little warning."
Oct 25th 2022
EXTRACT: " But in celebrating the CPC centennial, he [XI left little doubt of what those challenges might portend: “Having the courage to fight and the fortitude to win is what has made our party invincible.” A modernized and expanded military puts teeth into that threat and underscores the risks posed by Xi’s conflict-prone China."
Oct 8th 2022
EXTRACTS: "Recent inflation news from the eurozone’s largest member, Germany, is particularly alarming. In August, producer prices – which measure what is happening at the preliminary stages of industrial production – were a whopping 46% higher than in the same month last year. Given the long-term correlation between the growth rate of producer and consumer prices, this suggests that the latter could soar to 14% in November. Price stability – which is supposed to be the ECB’s uncompromising goal, per the Maastricht Treaty – is no longer perceptible" ----- "Since the 2008 global economic crisis, the ECB has allowed the central-bank money supply to increase twice as fast, relative to economic output, as the US Federal Reserve has. Of that growth, 83% was the result of the ECB’s purchases of government bonds from eurozone countries. With those purchases – which totaled an estimated €4.4 trillion – the ECB pushed interest rates on government bonds to around zero. This spurred countries to disregard European debt rules and accumulate debt at a breakneck pace."
Oct 7th 2022
EXTRACTS: "While some Russians have opposed the attack on Ukraine from the outset and publicly protested against the mobilisation that has just been declared, others, on the far right, feel that Russia is holding back too much and are increasingly calling for total mobilisation, the carpet-bombing of Ukrainian cities, and even the use of nuclear weapons." ----- "Will the Kremlin be able to channel the growing warmongering zeal? In view of the intensity of the rhetoric of the various wings of the Russian far right, backed recently by several Putin allies including the Chechen leader Ramzan Kadyrov, it is doubtful: whatever the outcome of the war in Ukraine, nationalist pressure is likely to become a serious and lasting threat to Russia’s internal stability."
Oct 3rd 2022
EXTRACT: "But US and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress. The crisis is here."
Sep 29th 2022
EXTRACTS "Ever since she became a prominent political figure 12 years ago, Truss has been a shapeshifter. She started as a Liberal Democrat before becoming a Conservative, and she voted to remain in the European Union before championing Brexit. As a minister, it is hard to think of anything she accomplished. She signed a few EU trade deals as Secretary of State for International Trade, but most of those were rollovers." --- "But if until recently it seemed that Truss was driven solely by political ambition, her government’s 'mini-budget' proposal sheds light on her deeper ideological affinities."
Sep 20th 2022
EXTRACT: "Russia’s focus on Ukraine and Putin’s choice to frame this as a civilisational struggle with the west has created opportunities for China to enhance its influence elsewhere – at Russia’s expense."
Sep 20th 2022
EXTRACTS: ”The Ukrainian army is making spectacular advances,” --- “…the European Union has fully mobilized to confront the energy crisis.” ---- “we are helping our partners in the Global South to handle the fallout from Russia’s brutal aggression and cynical weaponization of energy and food.” ---- “In short: the overall strategy is working. We must continue to support Ukraine, pressure Russia with sanctions, and help our global partners in a spirit of solidarity.”