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Global Economy Center Newsletter

While the global economy keeps growing at a healthy clip of 3.2 percent for 2018, focus is increasingly shifting to the end of this growth cycle. Eyes are now on which ball in the global economy will drop first. Probably not the US economy, which benefits from a policy stimulus keeping the economy growing well above its potential. The Euro Area is not quite as fortunate, as the recovery has ended and growth seems to be strongly moderating—but it is still well above its medium-term rate of only about 1.5 percent. Emerging markets are perhaps the place to look for the strongest signs of potential trouble. Divergent growth paths, caused by different impacts from rising US interest rates, a stronger dollar, and a higher oil price, raise the stress level in some economies to dangerous (e.g., Argentina or Turkey) or risky (such as India or Mexico). 

Does this mean a global recession is around the corner? That is not very likely provided that geopolitical risks remain contained. But containment may not be straightforward: First, economic policies need to continue to provide a favorable environment for investment while keeping inflationary and other financial risks in check. Second, labor market tightness needs to be controlled by increasing incentives for more people to work or work longer hours. Higher compensation is likely to be part of that equation. And third, it is hard to see the global economy continue to flourish if multilateral agreements on trade and other issues become dysfunctional. In such an environment, the ball is going to drop sooner or later somewhere. With proactive policy steps, the current expansion can run a bit longer, and an eventual downturn can be less severe.

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