Here’s what’s wrong with the world economy: No nation has the will or the way to be the locomotive for global growth.
The Federal Reserve looks set to hold off from raising interest rates again this week partly because of concerns that such a move would drive up the dollar and thus boost US imports. China is grabbing a greater share of world markets even as it professes a desire to reorient its economy away from exports. And Europe is also scavenging for demand to help contain Brexit-fed forces that are trying to pull the trading bloc apart, Bloomberg reported.
“I don’t see a locomotive coming down the tracks,” said Professor Barry Eichengreen of the University of California, Berkeley. “The US, China and Europe are all preoccupied by local problems.”
The probable result: World growth will remain trapped in the 2 to 3% channel that it’s been in since 2010. That is a performance that International Monetary Fund Managing Director Christine Lagarde has derided as “the new mediocre” and compares with the 3.6% average that prevailed in the five years prior to the 2008-09 global recession.
“We have at least another year of moving sideways, of being stuck in second gear,” said Nariman Behravesh, chief economist for consultants IHS Inc. in Lexington, Massachusetts. He sees world gross domestic product expanding 2.8% next year after climbing 2.4% in 2016.
Behind the lackluster out-turn: Monetary policymakers in Japan and the eurozone have “kind of run out of firepower” to spur their economies, said Charles Collyns, chief economist for the Institute of International Finance in Washington.
US Loses Firepower
While fiscal policy will increasingly come into play, it will be mostly a “holding operation” that will keep growth in mature economies more or less steady, Collyns, a former US Treasury official, added.
As the world’s largest economy, the US has frequently played the role of global locomotive in the past. But with US growth averaging just 2.1% since the end of the recession, American policy makers have been reluctant to see the country take on too much of that role.
“What I tell my colleagues around the world is, we can’t be the only engine in the world economy,” US Treasury Secretary Jacob Lew said at a conference in New York on Sept. 13. “There needs to be multiple engines.”
“The nearly 20% appreciation of the dollar from June 2014 to January of this year could be having an effect on US economic activity roughly equivalent to a 200 basis point increase in the federal funds rate,” Fed Gov. Lael Brainard said in a Sept. 12 speech in Chicago.
China Struggling
China took up the baton as global growth driver in the aftermath of the last recession, ramping up investment and corporate borrowing to spur the world’s second largest economy. Now, though, it is struggling with the fallout—excess capacity and increased indebtedness—and shows scant willingness to resume that role.
Premier Li Keqiang warned in July that, while the nation will remain a stabilizer for global growth, it also has its own downward pressures to contend with.
If anything, China is grabbing a larger chunk of world trade. Its global export share climbed from 12.9% in 2014 to 14.6% in 2015, the highest in IMF data going back to 1980.
Germany Profits
China’s export prowess won’t be enough to prevent Germany from pulling ahead of it this year as the country with the largest current account surplus, according to the Ifo Institute.
The Munich-based research group forecasts a German surplus in goods and services of $310 billion this year, up from $285 billion last year and topping China’s projected $260 billion in 2016.
As Europe and the eurozone’s largest economy, Germany has profited “enormously” from the weakness of the currency, Ifo economist Christian Grimme said in an email.
“Our locomotives have certainly lost some steam” said Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York.
