Is the Global Economy on the Verge of a Major Slowdown?

So far, the economic results that have come in for the second quarter of this year are largely encouraging.  Many of the world’s largest economies have recorded growth rates that at least met expectations, while some, such as the United States, recording their highest rates of growth in recent years.  Much of the positive news in the second quarter is the result of high levels of consumer spending in major economies such as the United States, China, Japan and Germany, proving that consumers remain the key drivers of global economic growth.

Despite these encouraging results, there are a number of reasons why we are concerned about the health of the global economy as it heads into the finals months of 2018.  Before we look at some of the key near-term risks facing the global economy, let’s look at the economic results for the second quarter for some of the world’s leading economies: 

• United States: The United States’ economy expanded by 2.8% on a year-on-year basis (4.1% annualized) in the second quarter, the highest rate of growth in the US since 2015.  Consumer spending and agricultural exports were the catalysts for this growth, offsetting weaker business spending during that period.

• European Union: Economic growth in the European Union slowed to 2.2% year-on-year in the second quarter, with growth being held back by poor performances of the region’s second- and fourth-largest economies (France and Italy).  In contrast, growth remained high in Central Europe and in some northern European countries.

• China: The Chinese economy expanded by 6.7% on a year-on-year basis in the second quarter, the lowest rate of growth there since late 2016.  The government’s efforts to reduce the threat of rising debt levels and the impact of the worsening trade war with the United States both proved to be drags on the Chinese economy.

• Japan: Economic growth in Japan held steady at 1.0% year-on-year (1.9% annualized) in the second quarter, a higher rate of growth than had been expected.  Consumer and business spending levels both exceeded expectations, offsetting concerns about the threat of a global trade war.

While the second quarter results that have been released so far suggest that the global economy is holding steady at a decent rate of growth, the fact is that the number of serious risks threatening the global economy has risen significantly in recent months.  These rising risks are evident in the growing nervousness among businesses and investors in most areas of the world, an unease that is resulting in increasing market volatility and disappointing levels of trade and investment.  It is little surprise that politics are playing a major role in many of these risks that are jeopardizing the health of the global economy, as geopolitical risk levels are also higher now than at any time in recent years.  At the same time, normal economic cycles are also playing a role in elevating economic risk levels in the latter part of 2018. 

Here are the five main risks facing the global economy in the final months of this year:

• The Threat of a Global Trade War: The fact that the world’s largest two economies (the US and China) are now engaged in a major trade war is alone a massive threat to the global economy.  However, both of these superpowers have shown their willingness to use their economic might as a weapon against smaller powers, a development that could lead to a series of trade-related showdowns around the world.

• Economic Cycles: Regardless of politics or economic policies, the fact remains that many of the world’s largest economies appear to be on the downwards arc of their economic cycles.  For example, Europe reached the peak of its latest economic cycle last year, and growth was all-but-certain to slow this year, with or without the other threats now facing that region’s export-dependent economy.

• Market Corrections: The market correction that occurred in the early part of this year resulted in around a 10%-to-15% decline in share prices on the world’s leading stock markets.  However, over-valued share prices and fears of a global trade war are likely to lead to yet another market correction in the months ahead, one that might be much larger than the one that took place earlier this year. 

• Emerging Market Crisis: Emerging markets outside of Asia had struggled mightily in recent years, but many of them thought that better days were ahead as growth returned to these countries over the past 18 months.  However, many of these emerging markets have been battered in recent months, highlighted by the deteriorating economic situations in countries such as Turkey, Iran and Argentina.

• Geopolitical Risk: As mentioned earlier, the level of geopolitical risk in the world is now higher than at any time since the early 2000s.  Worse, these risks are highlighted by growing competition between the world’s leading economic powers, and thus have the potential to severely disrupt the global economy and lead to lower levels of trade and investment.

Given the current state of the global economy and the rising threats to its well-being, is it inevitable that we are headed for a general slowdown in the coming months?  Furthermore, is there anything that economic policy-makers can do to avoid a slowdown, or at least cushion its blow? 

The answer to both questions appears to be yes.  First, economic growth appears all but certain to slow in the coming months.  The question is, by how much.  That is likely to be determined by decisions taken in Washington and Beijing, as the United States and China hold the key to the fate of global trade and investment in their hands.  Should they reach deals with each other and their other leading trading partners, an all-out trade war will be avoided.  However, should protectionist measures spread, the fall in trade and investment will drive down growth rates around the world. 

So far, only the most-exposed economies (emerging markets with high current account deficits) have been battered by these developments.  However, healthier economies will also suffer the consequences should trade and investment levels fall precipitously.  As a result, some momentous decisions will be taken in Washington, Beijing and elsewhere in the coming weeks and months, decisions that will determine the course of economies all over the world.