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Why World Economy is so Fragile?

World Economy

According to Goldman Sachs, the momentum of global economic growth slowed markedly in 2018. The most globally significant slowdown has been in the Chinese economy – the main engine of global growth since the financial crisis of 2007-08. But, Germany and Japan also recorded economic contractions in the third quarter of last year, i.e. 2018. Stock markets have also been in turmoil. In part, that presumably reflects worsening perceptions of prospects.

All this suggests a cyclical slowdown is on the way. Yet conventional forecasters are hardly unduly worried. The OECD stated last November that the “global expansion has peaked” and that global gross domestic product (GDP) growth is “projected to ease gradually from 3.7 percent in 2018 to around 3.5 percent in 2019 and 2020, broadly in line with underlying global potential output growth”. This would be an ultra-soft landing.

A mild economic slowdown should hardly be problematic. On the contrary, it is to be expected. In the high-income economies, which still generate three-fifths of world output (at market prices), the cyclical upswing is elderly and excess capacity has fallen sharply. Where the expansion is most advanced and excess capacity has disappeared, monetary policy has been duly tightened, quite appropriately. Happily, inflation is still subdued and nominal and real interest rates are low. While equity markets have indeed corrected, US stocks have rarely been as highly valued as today.

Nothing here suggests a severe global recession is on the way. Indeed, it bears remembering that while capitalist economies have always been cyclical, severe recessions, especially global ones, are rare. It would appear wise, in sum, for everybody “to keep calm and carry on”.

Yet there is a catch — a big one. The short-term cycle is the least of our challenges. There are also structural changes in the form of differential productivity trends and the long-term debt cycle. Crucially, these developments have made the world economy fragile.

Read More: Where is the World Economy Heading?

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