The state of the global economy

The U.S.

In the U.S. the expansion has moderated with the manufacturing sector bearing the brunt of weaker global growth and policy uncertainty. But, argues Karen Dynan, wealth has risen—even at the bottom—and consumer finances look good.

Going forward, though, odds of a recession occurring in the next 12 months have risen to between 30 and 40 percent as:

• Income growth is likely to slow and lend less support to consumption in coming quarters;
• Net exports should continue to be a modest drag due to the strong dollar, and;
• The drag on business investment from weaker global growth and policy uncertainty will continue.

In the event of a recession, the U.S. has limited room to use monetary policy to fight it but has considerable room to use fiscal policy to fight the next downturn.
The Economic Outlook: Global Slowdown
By: Karen Dynan – Harvard University

Europe

Jean Pisani-Ferry argues that there are a few downside risks in Europe. Namely:

• A weak momentum;
• Global trade policy uncertainty;
• European uncertainty due to Brexit’s potential consequences.

If the recession hits there is almost no room for monetary easing and very little space for fiscal spending within the rules. But climate action, he argues, could become the new European frontier. In particular:

• It could trigger investments of up to 2% of GDP per year (2021-2050);
• It could provide justification for debt-financed investments;
• It could increase Europe’s potential growth.

Perspectives on Europe
By: Jean Pisani-Ferry – Bruegel, EUI

Asia

According to the analysis by Prasad and Wu:

• “Japan is facing multiple headwinds, including weak global demand, the contractionary effects of a sales tax hike, and stubbornly low inflation. Financial conditions remain weak, as does the real economy. Business and consumer sentiment have plunged, auguring further economic weakness that could be accentuated by long-standing structural demographic and fiscal challenges.”
• “China’s economy is clearly slowing, although not as much as had been feared as the trade war with the U.S. drags on. The renminbi’s gradual depreciation against the dollar has been orderly thus far, but modest in its economic impacts. The government has undertaken only limited stimulus measures and has room for more. But for now it seems willing to accommodate a gradual easing of growth to a more sustainable level so as to refrain from stimulus that could raise longer-term financial and other risks.”
• “India is facing a sharp growth slowdown, driven in part by tight credit conditions and weak household consumption. The government recently pruned corporate taxes and liberalized restrictions on foreign direct investment, while the Reserve Bank of India has injected significant monetary stimulus through rate cuts.”

October 2019 update to TIGER: Sliding into synchronized stagnation
By: Eswar Prasad, Ethan Wu – Cornell University