25 January 2019

Financial Times: The cylinders of the global economy are starting to sputter

[...] The cylinders of the global economy are one by one beginning to sputter and slow in a manner that threatens serious trouble ahead. The first quarter of 2019, on top of weakness in some countries at the end of last year, seems unlikely to bring robust growth in any major economy.

True, some of the weakness reflects particular, and hopefully temporary, factors such as the US government shutdown. Uncertainty also surrounds two deadlines at the end of March — Brexit and the first session of the US-China trade talks. Yet even if those threats recede, the decision-making that produced such self-inflicted wounds does not bode well for the future, especially in the event of a more sustained slowdown affecting the global economy.

The patch of weakness in the eurozone that began in the late summer has now extended over half a year. Thursday’s grim news was German manufacturing output contracting for the first time in more than four years, according to a widely watched survey measure.

A similar survey of overall activity for the eurozone suggested economic growth was close to zero in the fourth quarter of last year. Some economists had expected growth to bounce back from a feeble 0.2 per cent in the third quarter, itself the slowest expansion in four years.

Recent news from China has added to the sense that the global economy is running out of reliable sources of momentum. This week it was revealed that Chinese GDP last year expanded by 6.6 per cent, the lowest since 1990, and by an annualised 6.4 per cent in the fourth quarter.

Some of the deceleration in China reflected restricted exports from the US tariffs imposed earlier in the year. But Chinese policymakers, while trying to boost growth using fiscal and monetary stimulus, have also tried to move China away from its long-established habit of debt-fuelled investment. Restraining borrowing for investment has hit infrastructure spending.

Trying to rebalance the economy without causing an overall slowdown has been a challenge for Beijing for a number of years. Weakening growth in big trading partners amid the threat of a full-blown trade war is a particularly tricky time at which to do it.

Hitherto, the US has proved to be a relatively reliable source of growth. Its recovery after the global financial crisis started earlier than that in, say, Europe, and has shown fewer signs of faltering. But Donald Trump’s shutdown of the federal government — a case-study in destructive grandstanding — means other governments may be unwise to rely on the US administration even to boost its own economy, let alone drive growth in the rest of the world. The boost from Mr Trump’s badly targeted fiscal stimulus of 2017 is moreover fading. It seems unlikely that any measured plan for economic stability will follow it.

Mr Draghi was right to warn that the outlook has darkened. For the moment, the ECB has not changed its expectation of medium-term monetary policy. A few more grim data releases like the ones this week and it, and its counterpart central banks elsewhere, may not have much choice but to lean again towards loosening. [...]

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