As global economic picture dims, solutions seem out of reach

WASHINGTON — As global leaders gather on two continents to take account of a darkening economic outlook, this is the picture they face:

Factories are slumping, many businesses are paralyzed, global growth is sputtering and the world’s two mightiest economies are in the grip of a dangerous trade war.

Barely a year after most of the world’s major countries were enjoying an unusual moment of shared prosperity, the global economy may be at risk of returning to the rut it tumbled into after the financial crisis of 2007-2009.

Worse, solutions seem far from obvious. Central banks can’t just slash interest rates. Rates are already ultra-low. And even if they did, the central banks would risk robbing themselves of the ammunition they would need later to fight a recession. What’s more, high government debts make it politically problematic to cut taxes or pour money into new bridges, roads and other public works projects.

“Our tools for fighting recession are no doubt more limited (than) in the past,” said Karen Dynan, an economist at Harvard University’s Kennedy School.

The International Monetary Fund and the World Bank have downgraded the outlook for worldwide growth. On Thursday, Moody’s Investors Service said it expects the global economy to expand 2.7% this year and next — down from 3.2% the previous two years. And it issued a dark warning: Get used to it.

“The new normal will likely continue for the next three to four years,” the credit rating agency said.

Concerns are rising just as central bankers meet in Jackson Hole, Wyoming, and leaders of the Group of Seven advanced economies gather this weekend in the resort town of Biarritz in southwestern France. A spotlight will shine, in particular, on whatever message Federal Reserve Chairman Jerome Powell sends in a speech Friday in Jackson Hole.

The dour global outlook partly reflects President Donald Trump’s combative trade conflicts with China and other countries. A realization has taken hold that Trump likely will keep deploying tariffs — and in some cases escalating them — to try to beat concessions out of U.S. trading partners.

“The trade uncertainty is here to stay,” said Madhavi Bokil, senior credit officer at Moody’s.

Squeezed by tightening protectionism, global trade is likely to grow just 2.5% this year, its slowest pace in three years, the IMF says. Manufacturers, whose fortunes are closely tied to trade, are struggling. J.P. Morgan’s global manufacturing index dropped in July for a third straight month, hitting the lowest level since 2012.

The global funk also reflects the pull of gravity: The economies of Europe and Japan, fueled by central banks’ easy-money policies, overexerted themselves a couple of years ago and are now returning to their more typical state: Sluggishness.

The IMF expects China’s economy, the world’s second biggest, to grow 6.2% this year — the weakest since 1990 — and just 6% next year. Trump’s trade war is certainly a factor. The president has imposed tariffs on $250 billion in Chinese imports and is set to tax nearly $300 billion more before year’s end. China’s slowdown is also being orchestrated in part by the officials in Beijing, who are trying to contain lending to control the country’s runaway debts.

And an economic chill in China sends shivers into the many countries — from copper-producing Chile to iron ore-making Australia — that feed Chinese factories with raw materials.

Then there’s Europe. In the 19 countries that use the euro currency, growth slowed to an anemic 0.2% in the second quarter from the quarter before. The eurozone, which maintains close trade ties with the U.S. and China, has been sideswiped by the collision between Trump and President Xi Jinping. What’s more, Trump has threatened to impose significant tariffs on European auto imports.

Even more than the tariffs themselves, uncertainty over whether the trade disputes will be resolved is chilling investment and purchasing. Despite cheap borrowing costs from central bank stimulus, investment in new plants is lagging — an ominous sign that bosses don’t foresee future prosperity.

In Europe’s usual economic powerhouse, Germany, the economy shrank 0.1% in the second quarter from the quarter before. If output should fall for a second straight quarter, , Germany would find itself on the verge of a recession.

Some of Germany’s troubles originate closer to home. Its major automakers have been compelled to sink billions into technology to meet stricter emissions tests, and some have endured delays in doing so. BMW lost money on its car business for the first time in a decade in the first quarter. Daimler posted its first net loss since 2009 in the second quarter.

Brexit is another risk for Europe. Prime Minister Boris Johnson says the UK will leave the 28-country European Union and its free-trade zone on Oct. 31, with or without a divorce deal. Not knowing what will happen is a nagging source of uncertainty.

Facing such risks, the European Central Bank has signalled that it could launch new monetary stimulus as early as next month. As recently as December, the ECB had been confident enough in the European economy to halt a nearly four-year, $2.6 trillion euro ($2.9 trillion) bond purchase program. That optimism has vanished.

The U.S. economy, now enjoying a record-breaking 10-year expansion, still shows resilience. American consumers, whose spending accounts for 70% of U.S. economic activity, have driven the growth.

Retail sales have risen sharply so far this year, with people shopping online and spending more at restaurants. Their savings rates are also the highest since 2012, which suggests that consumers aren’t necessarily stretching themselves too thin, according to the Commerce Department.

But Trump’s tariffs loom over the U.S. economy. The import taxes he plans to impose on China on Sept. 1 and again on Dec. 15 are likely to hit ordinary Americans more than the earlier rounds of tariffs.

Already, companies are delaying investments because they don’t know where to put new factories, seek suppliers or find customers until they have a better idea where the trade disputes are going. “Uncertainty is high,” said Eric Lascelles, chief economist at RBC Global Asset Management. “Businesses everywhere are sitting on their hands.”

“All forecasts for the U.S. economy in the second half of this year and beyond are contingent on the trade war,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, concluded in a note Thursday.

For all the global gloom, RBC’s Lascelles said policymakers aren’t without options. Even with short-term interest rates near zero, central banks can aggressively buy bonds to pump money into the financial system — the so-called quantitative easing the Federal Reserve, the ECB and the Bank of Japan used to revive growth during and after the financial crisis.

And even with the heavy debt burdens, governments could capitalize on low rates to borrow cheaply if they decided to stimulate their economies with tax cuts or stepped-up spending, Lascelles said.

Just Posted

Swedish climate activist Greta Thunberg coming to Alberta

Sixteen-year-old climate activist Greta Thunberg is coming to Alberta. The teen announced… Continue reading

Drumheller RCMP seize guns, cash, arrest two

Drumheller RCMP arrest a man and a woman and seize five restricted… Continue reading

Red Deer oilfield related company shutting doors after 25 years

Arresting You Ltd., a safety services provider in Red Deer, is shutting… Continue reading

Party leaders out on campaign trail Sunday turn focus to Toronto

OTTAWA — Liberal Leader Justin Trudeau is focusing his attention today on… Continue reading

Investigation requested into death of man in RCMP custody in Sask,

ONION LAKE, Sask. — The RCMP say a young man has died… Continue reading

Fashion Fridays: How to pose in photos

Kim XO, helps to keep you looking good on Fashion Fridays on the Black Press Media Network

Your community calendar

Wednesday Red Deer River Naturalists Flower Focus Group Meeting. When: Oct. 16… Continue reading

Man and child found dead after house fire in Manitoba early Saturday

NORWAY HOUSE, Man. — Police say a man and a child have… Continue reading

Thousands still without power after snow storm hammers Manitoba

WINNIPEG — It could be days before Manitoba Hydro is able to… Continue reading

Five things to watch for in the Canadian business world in the coming week

TORONTO — Five things to watch for in the Canadian business world… Continue reading

Trudeau dons protective vest as security threat delays Toronto-area rally

MISSISSAUGA, Ont. — Liberal Leader Justin Trudeau took extraordinary safety precautions at… Continue reading

Rewards for good behaviour part of school-violence prevention: teachers’ union

VANCOUVER — Hearing about the stabbing death of a 14-year-old boy outside… Continue reading

Wood pulp, steel cables: Scientists study how to make ice roads last longer

The road should have been frozen solid, but it was anything but.… Continue reading

RDC Kings hang on for win over MacEwan University Griffins

A night after Marc-Olivier Daigle stole a win, the RDC Kings exacted… Continue reading

Most Read