Can Synchronized Stagnation Be Stopped?
Given the growing risk of economic stagnation, governments may soon need to provide further stimulus – ideally in tandem with broader structural reforms. But with many governments seemingly lacking the political will to take such an approach, monetary policy will likely continue to shoulder the heavy and increasingly unsustainable burden of supporting growth.
ITHACA – The global economic slowdown is turning into a synchronized stagnation, with some major economies growing only weakly and others barely at all – or even contracting slightly. For now at least, fears of an imminent global recession seem premature. But policymakers have little appetite for fundamental reforms and limited room for effective macroeconomic stimulus, and thus seem at a loss for ways to revive growth.
The roots of the slowdown are not difficult to discern. Persistent trade tensions, political instability, geopolitical risks, and concerns about the limited efficacy of monetary stimulus continue to erode business and consumer sentiment, thus holding back investment and productivity growth. International trade flows have been directly affected as well. The World Trade Organization recently slashed its forecast for global trade growth in 2019 from 2.6% to just 1.2%. Furthermore, the Baltic Dry Index, a widely watched trade metric based on shipping rates for dry bulk commodities, nearly doubled in the first eight months of this year, but has since fallen by about 30%, erasing hopes of a trade rebound.
Meanwhile, global uncertainty has kept the US dollar strong relative to most other major currencies. Although dollar appreciation has taken some pressure off non-US economies that depend on exports or foreign capital, it has increased the risk of an open currency war.