At recent meetings of the World Bank and International Monetary Fund, I repeatedly heard the same dismal view: The global economy is in for low growth and historically low interest rates for a long time.
“Low for long” isn’t even the worst of it. In the event of a new recession, governments have limited monetary and fiscal firepower to stoke demand. The economic and political fallout of a serious downturn could get ugly.
Does it have to be this way? Certainly not, if governments address the causes of the current slowdown. Most of the finance ministers, central bankers and officials gathered in Washington had no trouble naming the biggest single factor: Trade tensions, they believe, are now the main thing holding growth back. Economists at the World Trade Organization agree. They estimate that global merchandise trade will grow by only 1.2% in 2019. As recently as April, their projection was 2.6%. This is a dramatic deceleration.
Two conclusions emerge from the data. First, uncertainty about access to markets and inputs is causing businesses to postpone investment. This means less output and job creation. Rising trade protection also means that capital and labor get deployed less efficiently. Underinvestment and misallocated resources in turn weaken productivity, leading to further losses in output and trade. Weak investment might already be holding trade back: New data suggest it will grow only half as fast as output this year.
Second, slower growth in output and trade appears to be synchronized across regions. It’s the dangerous obverse of a coordinated recovery, in which demand in one region supports growth in another. Today, no single region or major economy is growing strongly enough to pull the world out of the ditch.
The surest way out would be for governments to work together while moving to bolster growth at home. Reducing trade-related uncertainty would be valuable in its own right and would boost the efficacy of whatever monetary and fiscal headroom countries still have. But there’s little sign of such cooperation.
On the face of it, the new trade restrictions don’t amount to much: So far, they account for less than 5% of world merchandise trade. But this is to understate their impact. The real damage to growth arises from uncertainty over future market access for all goods and services. Before committing resources to a new project, businesses want to understand the risks. If new tariffs might wipe out profits, investors will pause, regardless of how cheap capital might be. In this way, trade uncertainty increases the danger that low interest rates will drive funds into riskier, higher-yielding financial assets. That kind of investment doesn’t add to capacity or improve productivity. Instead, it exacerbates financial volatility and fragility.
Failure to cooperate on trade also makes fiscal stimulus less effective. Increased public spending may come with calls to prevent demand from being met by foreign suppliers, reducing the benefits of a coordinated fiscal push. A decade ago, coordinated fiscal stimulus and a commitment to avoid protectionism helped countries bounce back from the worst of the 2008-09 crisis faster than would otherwise have been possible. That’s a far more promising approach.
To restore confidence to the global economy, rolling back the trade restrictions introduced over the past two years would be an important start — but only a start. Ending the most conspicuous “trade wars” and making progress on bilateral trade agreements can yield fast results, but the gains aren’t secure. Growth built on strong structural foundations requires a broader approach, involving more governments and firmer multilateral commitments.
Governments have an excellent opportunity to make progress of that kind and send a signal that they are ready to break the cycle of underinvestment and slow growth. They can commit to complementing ongoing bilateral processes with wider engagement — at the Group of 20, the World Trade Organization and other multilateral forums — to restore order to global trade.
“Low for long” is eminently avoidable — if policy makers resolve to end the uncertainty that is now threatening to become entrenched. If they fail, and let impediments to trade persist or get worse, their citizens had better brace themselves for what lies ahead.