As global economic picture dims, solutions seem out of reach

WASHINGTON (AP) — 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 paralysed, 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 (IMF) 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 per cent this year and next — down from 3.2 per cent 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 in Jackson Hole.

French police officers get instructions in front of the Le Bellevue at the beach promenade ahead of the upcoming G7 Summit in Biarritz, France. – PHOTO: AP

The dour global outlook partly reflects United States (US) President Donald Trump’s combative trade conflicts with China and other countries. A realisation has taken hold that Trump likely will keep deploying tariffs — and in some cases escalating them — to try to beat concessions out of US 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 per cent this year, its slowest pace in three years, the IMF says. Manufacturers, whose fortunes are closely tied to trade, are struggling. JP 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, fuelled 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 per cent this year — the weakest since 1990 — and just six per cent next year. Trump’s trade war is certainly a factor. The president has imposed tariffs on USD250 billion in Chinese imports and is set to tax nearly USD300 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 anaemic 0.2 per cent in the second quarter from the quarter before. The eurozone, which maintains close trade ties with the US and China, has been sideswiped by the collision between Trump and Chinese 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 per cent 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. Daimler posted its first net loss since 2009 in the second quarter.