Are We on the Verge of Another Global Economic Downturn

In recent weeks, nearly all of the economic news that has come from the world’s leading economies has been anywhere from disappointing to downright disturbing.  Moreover, the economic results from the second quarter of this year suggest that growth rates are struggling to rise in many of the world’s leading economies, while in others, growth appears to be heading downwards.  In most of the world’s developed economies, growth ceilings that were once much higher (4.0%-4.5% in New World economies, 3.0%-3.5% in Europe) are clearly now much lower as developed economies are proving incapable of sustaining even modest rates of growth.  Meanwhile, emerging market growth rates are significantly lower than in previous years, reducing their ability to drive global economic growth.  Overall, the global economy has stagnated in recent years, with global growth rates of just above 3% since 2012.  Moreover, global economic growth could fall below 3% this year for the first time since 2009.  Worse, the outlook for the coming years has deteriorated, potentially signaling a significant global slowdown.

Much of the bad news in recent weeks has come from the world’s leading economies.  For example, the United States economy dramatically underperformed in the first half of this year, despite the fact that US consumer spending levels have been rising.  Instead, US business spending has been much weaker than expected as business confidence levels have fallen.  In Europe, that region’s fragile economic recovery appears to have already peaked at a relatively low level of growth, with most countries in that region reducing their growth forecasts for the remainder of this year and for next year as well.  China too appears likely to experience a further slowdown in the months ahead, although there, recent manufacturing and retail data has eased fears that this slowdown will involve a major decline in growth.  Finally, Japan’s economy remains a mess, with growth, if there is any, certain to be anemic at best in the months ahead.  Altogether, the world’s four largest economies all have reason for concern as we head into the final months of 2016 and each economy could see further declines in their fortunes in the years ahead.

There is no single factor that is driving this slump, but rather, a combination of factors that are impacting the global economy at an inopportune time.  For example, long-term factors such as the demographic decline underway in all of the world’s largest economies will always act as a restraint on the growth rates of these economies.  However, other factors that are not constant are also contributing to this slowdown.  For example, business and investor confidence levels are low (and falling) in many of the world’s leading economies, holding back trade and investment.  In fact, global trade levels are set for a further slump this year, while foreign investment flows remain below their pre-crisis peak.  Meanwhile, the spectre of protectionism and populism is placing a dark cloud over the global economy at a time when politicians should be doing more to boost consumer, business and investment confidence levels in their countries. 

While we believe that this 3% global growth level will hold in place over the next few years, the chances of a major global slowdown have clearly risen.  To avoid this potential slowdown, a number of developments will have to take place.  First, the world’s two largest economies, the United States and China, will have to avoid a deeper slowdown in the coming months and resume their role as the key drivers of global economic growth.  Second, Europe and Japan will have to avoid deflationary traps and generate more growth in their home markets.  Third, emerging markets outside of Asia, such as Brazil and Russia, will have to pull out of their ongoing recessions and return to a level of growth approaching those that they had achieved in earlier years.  Each of these three developments is far from guaranteed, and, in fact, it is entirely possible that none of them take place, thus leading to a major downturn for the global economy.  Furthermore, all of the world’s leading economies appear quite fragile at the moment, exposing them to the impact of potential external shocks.  Altogether, the global economy has found itself in a bad place, and the threat of a major downturn has risen significantly.