After galloping for the past two years, the global economy is showing signs of weakening, with the United States, China and Europe all facing the growing threat of a slowdown.
Few economists predict a true global recession within the next year. But the synchronized growth that has fueled most major economies since 2017 appears to be fading. The risks have been amplified by the raging trade war between the United States and China, the disputes dividing Britain over an exit from the European Union and the continued hikes in interest rates from the Federal Reserve.
All of this was enough to contribute to a large pullback in global equity markets. Counting Tuesday’s heavy losses, U.S. stock indexes, once up about 10% for the year, have given up all of their 2018 gains.
The Fed is expected to raise its short-term policy rate next month for the fourth time this year. Central bank rate hikes help control inflation. But they also make loans more expensive for consumers and businesses. And for countries that have borrowed in US dollars, Fed hikes are making debt harder to bear. Argentina, for its part, slipped into recession as its cost of debt repayment rose.
“We can’t keep growing this fast any longer without risking inflation,” Adrian Cooper, managing director of Oxford Economics, said of the strength of the US economy. “That’s ultimately what the Fed is trying to achieve with its steady move in interest rates. The skill is to do it in a way that doesn’t create a significant slowdown.
Worries have grown enough that Larry Kudlow, President Donald Trump’s top economic adviser, brushed aside the concerns that have been rocking the markets on Tuesday.
“The recession is so far away that 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 over the past two years has been widely hailed after a weak recovery from the 2008 financial crisis. Yet few economists saw accelerated growth as sustainable, or even desirable, over several years.
The worry is that a prolonged global expansion could trigger inflation or speculative investment that would inevitably drag vulnerable economies into a downturn. Complicating the challenge, global economies are linked more than ever by trade, finance and investment – to the point that a rift in one major nation tends to spread across the world.
Oxford Economics predicts that the growth of the global economy, as measured by its gross domestic product, will decline from 3.1% this year to 2.8% in 2019. Such a slowdown is enough to reduce corporate profits and investments. businesses, Cooper said. Still, most American and European workers were unlikely to feel the pain, he said, in part because of a resilient labor 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 go up,” Cooper predicted, adding that he thinks the downturn will get worse in 2020.
Meanwhile, however, equity markets suffered jittery selling waves as investors tried to price in a slowdown that could dampen corporate earnings growth.
“Financial markets have become a little more volatile and anxious lately, worried about slowing global growth, trade tensions, Brexit woes and fears that the US will not be able to maintain its sweet spot. current cyclical cycle,” said Josh Feinman, chief economist at Deutsche Asset Management.
Over the next two years, most forecasts suggest that US growth, after peaking at more than 3% this year – its best performance since 2005 – will weaken. Fed Chairman Jerome Powell acknowledged in a speech last week that the strong global growth of 2017 is in decline.
“You see signs of a gradual slowdown,” Powell said.
Goldman Sachs forecasts that annual growth in the United States will slow to 1.75% by the end of 2019. The projected weakening stems, in part, from the early stimulus from the tax cuts Trump pushed through Congress. The boost from tax reform is expected to fade by 2020.
An ongoing threat to the US economy is Trump’s trade war with China. The president imposed a 10% tax on $200 billion worth of Chinese goods – a tariff that is expected to rise to 25% in 2019. He also threatened to add tariffs on another $250 billion worth of Chinese goods.
A prolonged trade crisis would depress global trade in goods and, therefore, economic growth. Trump is due to meet President Xi Jinping at an international Group of 20 meeting in Argentina next week. But the prospects for a breakthrough seem to have faded.
“The two countries appear to be very far apart on the trade dispute and do not want to back down at this stage,” said Scott Anderson, chief economist at Bank of the West.
Likewise, political rifts threaten to slow the pace of Europe’s five-year expansion. Britain is struggling to complete its exit from the European Union and uncertainty surrounding Prime Minister Theresa May’s government has rattled markets.
In Italy, tensions have erupted over a government that wants to increase borrowing in defiance of rules on deficits between the 19 countries that share the euro. Rising indebtedness could push Italian interest rates to levels that would stifle growth and strain the eurozone.
Yet the biggest risk of all could be China, the world’s second-largest economy after the United States and the main driver of global growth for several decades. Its economy was already cooling before Trump raised tariffs in hopes of closing the trade gap between the United States and Beijing and protecting American technology.
Among businesses and economists, the question is not whether Chinese growth will slow further; how much is it. In September, year-on-year economic growth hit a post-global crisis low of 6.5%. This followed a regulatory crackdown on bank lending to curb rising debt. Forecasters expect the decline to steepen at least through mid-2019.
The ruling Communist Party wants slower, more self-reliant growth driven more by consumer spending and less by trade and investment. But the fall was more brutal than expected. In response, Beijing cut taxes, eased loan controls and pumped money into construction projects.
October auto sales fell 13% from a year ago, putting vehicle sales in China – the industry’s No. 1 market – on track to decline this year for the first time in three decades. Home sales and bank loans fell, and spending on factories and other manufacturing assets slowed.
“Further measures” are needed to “put a floor under economic growth,” Julian Evans-Pritchard of Capital Economics said in a report.
Finding that floor could prove problematic if the trade war with the Trump administration diminishes the exports that have propelled the Chinese economy toward manufacturing dominance. UBS analysts estimate a 20% chance that China will suffer a much steeper slowdown due to escalating tensions with the United States.
“In this environment, contagion in global markets could not be avoided,” the UBS analysts wrote.
McDonald’s contributed from Beijing. AP writers Martin Crutsinger and Darlene Superville in Washington also contributed to this report.