Global Economic Outlook: Slowing, but Still Growing
Lengthy U.S. economic growth can continue
Key risks are interest rate, trade policy errors
Fears of recession in near future are unfounded
The high-water mark for economic growth is probably behind us. The synchronized global expansion that began roughly two years ago has peaked, giving way to slower and more divergent GDP among the world’s economies. Evidence is mounting that the global expansion has entered the later stage of the business cycle, where growth slows, inflation picks up, interest rates rise, and asset returns become more volatile. Still, gathering talk of recession appears premature.
U.S. economic momentum remains strong. Though we expect domestic GDP to slow gradually back to trend over the next year as financial conditions tighten and the impact of fiscal stimulus fades, healthy household balance sheets, robust job gains, and high confidence all remain important near-term tailwinds.
Policy mistakes on trade and interest rates are the major risks to the outlook. Uncertainty surrounding trade is weighing on overall economic activity and particularly on business investment, reducing some of the key expected benefits of corporate tax reform. Nevertheless, the impact of trade disputes by themselves on the U.S. economy should be manageable, given the strength in underlying fundamentals.
Far more important is the interest rate backdrop. Interest rates remain low by historical standards, but higher borrowing costs are already affecting rate-sensitive industries such as housing and automobiles. Importantly, after five consecutive quarterly hikes, the Fed has signaled that it is mindful of the risks of overtightening.
Overseas, there is even less appetite for tighter monetary policy. The ECB’s bond buying program has ended but the Euro economy remains sluggish, with inflation still well below target. Uncertainty over Brexit negotiations has halted rate hikes by The Bank of England. Meanwhile, faced with structural strains in Japan and slowing GDP in China, Asian central bankers seem likely to keep policy loose.
Recent nervousness about the sustainability of growth is understandable—no expansion lasts forever. Although the U.S. expansion is set to enter uncharted territory by becoming the longest on record this July, it is aging gracefully. We still see few signs of overheating in sectors of the economy that have heralded some recessions in the past, or the credit excesses that have preceded others. Indeed, there’s no reason late-cycle environments can’t last a long time if major policy mistakes are avoided.