A decade on from the global financial crisis, the world economy is not in good health.
Britain is paralysed by Brexit uncertainty, the Eurozone – including its seemingly invincible German powerhouse – is stuttering, and China is experiencing its slowest economic growth since 1990.
Even the US, which had been performing well of late, is seeing a slowdown as the sugar rush of Trump’s tax cuts wears off.
The IMF frets about “a shadow over global economic prospects” while the World Bank warns ominously of “darkening skies”.
February figures for the manufacturing sector released on Friday failed to reassure. While Britain’s factories expanded their output slightly (largely due to one-off Brexit stockpiling) its manufacturers reported plummeting confidence in the face of weak demand and are cutting jobs at the fastest rate in six years.
The Eurozone’s factory sector as a whole retreated for the first time in half a decade, with Germany, Spain and Italy the biggest drags on output. Neither was Asia immune, with China’s manufacturing sector stagnating and Japan’s unexpectedly contracting.
While it is too early to start speaking of recession, the combination of slowing overall growth, a contracting manufacturing sector and sinking business confidence does not bode well.
Moreover, there is no reason why every country should fall into recession at once, with a more likely scenario being individual countries – especially those with particular vulnerabilities – catching cold one by one, in the process worsening economic confidence and accelerating the contagion.
While at the moment Italy is the only advanced economy in recession, a continuation down that path – with its serious consequences for Italy’s already dire public finances – would quickly resurrect investor anxiety about the resilience of the entire Eurozone, especially if the Italian government decided to pick another fight with Brussels.
Meanwhile Germany only very narrowly avoided recession last year (by 0.1 per cent in the fourth quarter to be precise) and Britain, whose economy shrunk in December, risks being pushed into the red by a no-deal Brexit or even just a continuation of the on-going limbo, which has already led to substantial falls in business investment and stagnating economic growth.
At such times one might count on politicians to take bold action to stem the bleeding, but today they both lack the tools to do so and are to a large extent themselves the cause of the problem.
Trump’s ongoing trade war bears much of the responsibility, with analysts blaming it for both the slowdown in China and Germany’s flirtation with recession.
While the protectionist measures have overwhelmingly targeted China, the tariffs on steel and aluminium were also applied to the EU, and with Trump continuing to threaten imposing duties on cars from the bloc, the damage could yet be greater.
Meanwhile rising interest rates in the US – themselves largely a response to Trump’s ill-considered tax cuts – have put serious pressure on the currencies and public finances of developing economies, most notably Turkey and Argentina. Further tightening by the Fed this year could spell crisis for emerging markets, with unpredictable consequences for the global economy.
Brexit is another cause of the current economic uncertainty with entirely political roots. In its latest assessment of the world economic outlook, the IMF highlighted “the rising possibility of a disruptive, no-deal Brexit with negative cross-border spillovers” as a serious risk factor.
While Theresa May’s concession last week (giving parliament a vote on no-deal) now makes this less likely, it is hard to argue that the Government’s handling of Brexit has been anything less than disastrous for business.
Neither are policymakers in a healthy position to fight recession if it does come knocking. Despite sustained efforts to reduce it since the last crash, average public debt in OECD economies remains at 73 per cent of GDP (compared to 50 per cent pre-crisis), limiting governments’ capacity to open the fiscal floodgates in order to revive growth. Interest rates in the US, the EU and Britain are still far below their pre-crisis levels, limiting the scope for expansionary monetary policy.
The Eurozone’s (read: France and Germany’s) failure to meaningfully reform its economic institutions, despite plenty of time and no shortage of reasonable proposals, will come back to bite it when the next crisis hits. As for China, it is unlikely to replicate the massive spending spree it undertook in 2008, given it is already cutting taxes to boost its flagging economy while attempting to reduce its reliance on cheap debt.
It is of course futile to predict recessions, and things may yet take a turn for the better. But historical patterns, and current developments, do not augur well. We would all do well to buckle our seatbelts and brace for turbulence.