The downturn could come in 2020, with implications for both the US presidential election and Brexit processby George Magnus / March 12, 2018 / Leave a comment
It’s not for nothing that economics is known as the dismal science. We are being urged to celebrate synchronised global economic growth again—but it’s not too soon to start thinking about the next recession.
Let’s start with the good news. If the United States expansion keeps going until July 2019, and it will, it will be 121 months old and America’s longest expansion since records began in 1854. The UK’s longest expansion was from the 1991 recession to the 2008 peak, and so we would have to keep ours going for a good few years yet to break that record. Yet, at nine years this summer, it is quite mature compared with most cycles.
Down under in the lucky country, Australia, there hasn’t been a recession for 26 years. On official data, China has never had one in modern times, though it almost certainly came close in both 2008 and again in 2015.
The counterpoint to long expansions, though, is that they do always end, and the fingerprints of central banks and governments are usually found at the scene. For what it’s worth, I think this long-in-the-tooth expansion will keep going through 2019 but there’s a good chance that the next global contraction will occur in 2020. This would be just in time for the US presidential election and most likely hit the UK as we are in the process of leaving the European Union.
The main place to look is the US, where it appears that the Federal Reserve is going to drive a four-by-four kind of monetary policy. Four rate rises this year, and four in 2019, pushing the policy rate up 2 percentage points to about 3.25-3.5 per cent. The likelihood of this happening has been strengthened by the first remarks of new Fed Chair Jerome Powell to Congress, and a recent speech by a highly respected and normally dovish Governor, Lael Brainard. Both opined that some of the economic headwinds the US has faced in recent years have turned into tailwinds, and that the Fed would therefore have to be more vigilant.
The argument runs as follows. Synchronised growth is pulling forward expectations of monetary policy shifts in the US and elsewhere. The US dollar, which rose in trade weighted terms by 25 per cent between 2014-2016, has fallen by 8 per cent in the…