Fortunate Accident? Global slowdown may be a soft landing without recession
Media contact: Michele Heller
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WASHINGTON—The global economy is slowing because of the fading fiscal stimulus in the United States, uncertainty over trade wars, and other potential disruptions concentrated in Western Europe, according to economists at the Peterson Institute for International Economics (PIIE). Most large economies, however, are likely to continue to expand through 2020, even as the broad slowdown pushes interest rates down and the dollar up. While the risk of recession has risen, it is not as high or as impossible to counter as many fear. These and other assessments are being presented today at PIIE's semiannual Global Economic Prospects event.
Karen Dynan, nonresident senior fellow at PIIE and former chief economist at the US Department of Treasury, will present her semiannual outlook for the US economy and the largest G-20 economies. Jean Pisani-Ferry, PIIE visiting fellow and former commissioner-general of France Stratégie, will take a deeper look at the major EU economies, in light of Brexit, political tensions, and German manufacturing troubles. Maurice Obstfeld, PIIE nonresident senior fellow and former director of research at the International Monetary Fund (IMF), will assess how the international environment affects the US economy and should increasingly influence the Federal Reserve's monetary policymaking.
Global economic growth is slowing due to a confluence of headwinds, including waning fiscal stimulus in the United States, higher trade barriers and uncertainty around future trade policy, Brexit, and other potential disruptions. While broadly felt, different economies are experiencing different degrees of drag. The US economy is expected to expand 2.3 percent in 2019 and 1.8 percent in 2020—down from nearly 3 percent in 2018. The household sector is likely to continue to be the main driver of US growth, due to increased consumer spending. Dynan cautions that the headwinds from the global slowdown and the escalating trade war with China have considerably increased the risk of recession in the United States. She argues that US policymakers have sufficient tools to respond to a typical recession but will need the will to use them.
As the global economy slows in coming months, disparity will prevail among the main European countries. The outlook in the United Kingdom is dominated by Brexit, the modalities of which are unlikely to be settled in time for an agreement before its scheduled departure from the European Union on October 31. Growth has stalled in Germany (because of stagnating exports) and Italy (for domestic reasons), while it is still buoyant in Spain and solid in France. If a recession materializes, Pisani-Ferry warns that the eurozone risks finding itself short of ammunition, again depending upon political will. With essentially no room for monetary action, attention must turn to the narrow and uneven fiscal space, at least within the current rules of the European fiscal pact. He forecasts that Europe's ambitious climate change mitigation transition could get around these self-imposed limits soon but is bound to have major long-term consequences for growth, public finances, and trade.
In the United States, the Federal Reserve has cut interest rates twice so far in 2019 despite a US growth rate that remains above the economy's long-run potential rate and an unemployment rate not seen since the 1960s. In an analysis of global influences on US monetary policy, Obstfeld points out that the Fed must adjust the US real interest rate in line with global forces to meet its domestic mandates of high employment and price stability. As a result, slower growth abroad can justify a reduction in US rates even if US growth remains relatively high. Real interest rates appear to be persistently low across the globe, however, implying that many central banks, including the Fed, will have limited room to respond to a new recession. Obstfeld points out that lower interest rates do, however, expand the budgetary space for fiscal easing, which will have to play a bigger role in offsetting any future economic slowdown.
About the speakers
Karen Dynan, PIIE nonresident senior fellow and professor of the practice in the department of economics at Harvard University, was assistant secretary for economic policy and chief economist at the US Department of the Treasury from 2014 to 2017, where she led the analysis of economic conditions and development of new policies. From 2009 to 2013, she was vice president and codirector of the Economic Studies Program at the Brookings Institution.
Jean Pisani-Ferry, PIIE visiting fellow, holds the Tommaso Padoa-Schioppa chair at the European University Institute in Florence and is a senior fellow at Bruegel, of which he was the founding director from 2005 to 2013. From 2013 to 2016, he served as commissioner-general of France Stratégie, the ideas lab of the French government.
Maurice Obstfeld, PIIE nonresident senior fellow and Class of 1958 Professor of Economics at the University of California-Berkeley, served at the International Monetary Fund as economic counselor and director of the research department from 2015 to 2018 and a member of the US president's Council of Economic Advisers from 2014 to 2015.
The Peterson Institute for International Economics (PIIE) is a private, nonpartisan nonprofit institution committed to rigorous, intellectually open, and indepth study and discussion of international economic policy.
The Institute’s areas of study include international trade and investment, international finance and exchange rates, macroeconomic policy and crisis response, globalization and human welfare, and studies of key economic regions. Institute staff have unique expertise on the major economies with special reference to Brazil, China, the European Union, Japan, Korea, and the Middle East, as well as the United States itself and its neighbors Canada and Mexico.