The Global Recovery’s Downside Risks

NEW YORK – For the past two years, the global economy has been growing, but it has swung between periods of rapid expansion and deceleration. During this period, two episodes, in particular, caused US and global equity prices to fall by about 10%. Is a pattern emerging, or is a fitful global recovery set to stabilize?

The first episode came in August/September 2015, when many observers feared that China’s economy could be headed for a hard landing. The second episode, in January/February 2016, also stemmed from concerns about China. But investors were also increasingly worried about stalling US growth, collapsing oil and commodity prices, rapid interest-rate hikes by the US Federal Reserve, and unconventional negative-rate monetary policies in Europe and Japan.

Each deceleration episode lasted for about two months, at which point the correction in equity prices began to reverse. Investors’ fears were not borne out, and central banks began to ease their monetary policies; or, in the case of the Fed, put rate hikes on hold.

As a third example, one could cite the period following the United Kingdom’s Brexit referendum in June 2016. But that episode was more short-lived, and it did not cause a global slowdown, owing to the small size of the UK economy and monetary easing at the time. In fact, in the months before US President Donald Trump’s election last November, the global economy actually entered a new period of expansion – albeit one in which advanced and emerging-market economies’ potential growth remained low.

We may still be living in what the International Monetary Fund calls the “new mediocre” – or what the Chinese call the “new normal” – of low potential growth. And yet economic activity has started to pick up in the US, Europe and the eurozone, Japan, and key emerging markets.