US President Joe Biden speaks about rebuilding American manufacturing at the groundbreaking of the new Intel semiconductor manufacturing facility in New Albany, Ohio, on September 9, 2022. Crumbling levels of business confidence and a persistently inverted Treasury yield curve are just some of the indicators that a recession is imminent. Photo: Reuters
Opinion
Macroscope
by David Brown
Macroscope
by David Brown
Looming US recession puts pressure on others to get growth policies right
With the US in trouble and world trade growth slowing, major exporters such as China and Germany must compensate with extra domestic reflation
Global growth needs careful nurturing by policymakers, and a return to much easier economic policies should be a priority
It’s not a question of if, but when. Recession is an inevitability in the United States and in several other major industrial nations which are on the brink of two successive quarters of negative growth this year. The problem is that the scope for remedies is limited, with global monetary policy given over to fighting inflation and government budgets severely overstretched from the Covid-19 pandemic.
For a major manufacturing country such as China, which hopes for healthy world trade growth to fuel faster export sales, it could hamper plans for a GDP target of around 5 per cent this year. With global recovery in jeopardy, even greater emphasis is being placed on domestic-driven growth and the need for a much bigger policy push by Beijing.
Easier credit, lower interest rates and even more budget stimulus will be needed to keep growth plans on track. What applies to China is just as true for the advanced economies, if the world is to be spared a deeper downturn this year. The policy spigots must be reopened again, and quickly.
It’s clear from the current data that global economic confidence is starting to slide. Business activity indicators are weakening, inflation has peaked, interest rates are too high and governments are under pressure to rein in excessive deficit spending after years of fiscal overload. The shock waves from recent banking collapses have hardly helped matters, with many global business confidence pointers taking a turn for the worse recently.
The purchasing managers’ index (PMI) for global manufacturing, published by JP Morgan and S&P Global, dropped back to 49.6 in March, below the 50 mark that is the threshold between expansion or contraction in factory-sector business activity. It’s an ominous sign for those hoping for faster global recovery.
A worker welds steel for the construction of the Eco Edison vessel at a shipyard in Houma, Louisiana, on April 4. When completed next year, the Eco Edison is expected to be the first US-built vessel to service offshore wind farms. Photo: Bloomberg
In the US, business confidence continues to go from bad to worse. The benchmark Institute for Supply Management’s manufacturing PMI slipped even further below the boom/bust line, down to 46.3 in March. This is the lowest since the short-lived 2020 US recession. It suggests another recession could on the cards soon.
The spectre of recession is also highlighted by financial market indicators such as the US Treasury bond curve, with the spread between 10-year and two-year yields inverting into negative territory for the past nine months. An inverted Treasury yield curve is a reasonably good yardstick that the US economy is already recession-bound.
This should be the point where the Federal Reserve relents and changes tack from tightening to easing, especially now that US inflation is showing signs of slowing and could even be heading towards the Fed’s 2 per cent target by the end of the year. The trouble is the Fed seems determined to give inflation one last squeeze, with another rate increase looking likely in May.
If this happens, it would be a clear case of overkill, considering where economic activity indicators could be heading in the next few months. If recession gets a foot in the door, it won’t be a matter of too much inflation but the spectre of deflation appearing again.
The Fed is playing a dangerous game of brinkmanship. The problem is that it’s not the only central bank going for monetary overkill. If the major central banks don’t alter course soon, the consequences for global economic confidence could be grim.
With the US – the world’s largest economy – at risk of recession and world trade growth slowing sharply, it puts pressure on major exporting nations such as China and Germany to compensate with extra domestic reflation to take up the slack.
02:24
China records second-lowest economic growth figure in almost 50 years after Covid-ravaged 2022
China records second-lowest economic growth figure in almost 50 years after Covid-ravaged 2022
There is no question of China falling into recession, but Beijing must ensure the right macro policy settings are in place to meet the 2023 growth target. If Beijing can’t rely on faster export growth to give the economy a boost, it needs to ensure its dual circulation strategy works even harder so domestic-driven demand provides an extra impetus.
This means keeping domestic interest rates on a downward track and providing ample liquidity to bring down the cost of borrowing to consumers and businesses. It also means more government spending and investment to support the recovery, suggesting a bigger budget deficit for this year.
World policymakers have their work cut out. Global growth needs nurturing, and a return to much easier economic policies should be a priority.
David Brown is the chief executive of New View Economics
