The US-China trade war could soon tip the world economy into a downturnby George Magnus / June 24, 2019 / Leave a comment
At the G20 summit at the end of this week, the leaders of national and international organisations, their entourages, and the media will discuss important topics such as global development, innovation, climate change, women’s empowerment and global health. Yet the meetings on 28-29th June will be dominated by two other closely correlated issues: the prospects for a fragile world economy, and the outcome of the planned meeting between President Donald Trump and President Xi Jinping after the trade war truce collapsed last month.
The latest official prognosis about the state of the world economy, by the OECD last month, suggests global growth will slow to about 3 per cent this year—a level that is firmly in stagnation territory for most major economies. The OECD expects the tempo to rise slightly in 2020, but its economic gurus are not happy, and you can see why.
They say that the world economy depends too much on policy support. Cue comments from Mario Draghi, outgoing President of the ECB, who said recently that the central bank might have to persist with quantitative easing and cut interest rates to support the Euro Area economy, and the Federal Reserve, which said last week, in effect, it was likely to cut interest rates for the first time in a decade next month. The Bank of Japan is continuing with an aggressive QE programme, and the People’s Bank of China is providing significant liquidity to the Chinese banking system, which is creaking a bit because two small regional bank failures seem to have got the authorities worried about contagion risk.
Note that for most major central banks, monetary policy has still not normalised since radical measures began in 2008, and that’s with economic growth continuing. What they will do in the next downturn, no one yet knows. Nor, probably, do they.
Further, the OECD reminded us that although unemployment levels are the lowest in about 40 years in rich nations, real wages are only inching up by 1.5-2 per cent, not nearly enough to compensate for the past stagnation in living standards or close the income inequality gap.
Several further areas of vulnerability were emphasised. These included high levels of debt among US companies and in emerging markets, high valuations in property markets, anaemic European growth (compounded by the risk of confrontation between…