Most economic forecasts suggest that a recession in China will hurt everyone, but that the pain would be more regionally confined than would be the case for a deep recession in the United States. Unfortunately, that may be wishful thinking.
CAMBRIDGE – When China finally has its inevitable growth recession – which will almost surely be amplified by a financial crisis, given the economy’s massive leverage – how will the rest of world be affected? With US President Donald Trump’s trade war hitting China just as growth was already slowing, this is no idle question.
.. First, the effect on international capital markets could be vastly greater than Chinese capital market linkages would suggest. However jittery global investors may be about prospects for profit growth, a hit to Chinese growth would make things a lot worse. Although it is true that the US is still by far the biggest importer of final consumption goods (a large share of Chinese manufacturing imports are intermediate goods that end up being embodied in exports to the US and Europe), foreign firms nonetheless still enjoy huge profits on sales in China.
Investors today are also concerned about rising interest rates, which not only put a damper on consumption and investment, but also reduce the market value of companies (particularly tech firms) whose valuations depend heavily on profit growth far in the future. A Chinese recession could again make the situation worse.
.. High Asian saving rates over the past two decades have been a significant factor in the low overall level of real (inflation-adjusted) interest rates in both the United States and Europe, thanks to the fact that underdeveloped Asian capital markets simply cannot constructively absorb the surplus savings.
.. instead of leading to lower global real interest rates, a Chinese slowdown that spreads across Asia could paradoxically lead to higher interest rates elsewhere – especially if a second Asian financial crisis leads to a sharp draw-down of central bank reserves. Thus, for global capital markets, a Chinese recession could easily prove to be a double whammy.
.. a significant rise in global interest rates would be much worse. Eurozone leaders, particularly German Chancellor Angela Merkel, get less credit than they deserve for holding together the politically and economically fragile single currency against steep economic and political odds. But their task would have been well-nigh impossible but for the ultra-low global interest rates
.. Today, however, debt levels have risen significantly, and a sharp rise in global real interest rates would almost certainly extend today’s brewing crises beyond the handful of countries (including Argentina and Turkey) that have already been hit.
.. Nor is the US immune. For the moment, the US can finance its trillion-dollar deficits at relatively low cost. But the relatively short-term duration of its borrowing – under four years if one integrates the Treasury and Federal Reserve balance sheets – means that a rise in interest rates would soon cause debt service to crowd out needed expenditures in other areas. At the same time, Trump’s trade war also threatens to undermine the US economy’s dynamism.
.. Its somewhat arbitrary and politically driven nature makes it at least as harmful to US growth as the regulations Trump has so proudly eliminated. Those who assumed that Trump’s stance on trade was mostly campaign bluster should be worried.
.. A recession in China, amplified by a financial crisis, would constitute the third leg of the debt supercycle that began in the US in 2008 and moved to Europe in 2010. Up to this point, the Chinese authorities have done a remarkable job in postponing the inevitable slowdown. Unfortunately, when the downturn arrives, the world is likely to discover that China’s economy matters even more than most people thought.
how bad a thing is this fiscal profligacy?
it means higher debt, which will in turn reduce the “fiscal space” for responding to the next crisis. It will also crowd out investment, hurting long-run growth.
.. I’ve been seeing some people suggesting that rising deficits are going to hurt the economy in the short run, perhaps even cause a recession. Will they?
.. lot of policymakers bought into the doctrine of “expansionary austerity,” in which slashing government spending in a depressed economy would somehow lead to a big rise in private spending. But this doctrine, as I wrote at the time, depended on belief in the “confidence fairy”
- belief that somehow consumers and investors would be so reassured by the government’s willingness to inflict pain that the economy would surge.
.. why will the blowup in the deficit cause the Fed to raise rates? Precisely because it will tend to make the economy grow faster in the short run, raising the perceived risk of inflation, and the Fed will raise rates to head that risk off.
.. it will limit the magnitude of the expansionary effect, not turn it into contraction.
.. the G.O.P.’s fiscal behavior has been hypocritical, irresponsible, and reprehensible. But it won’t cause a recession.
The Public Investment Fund is supposed to be Saudi Arabia’s sovereign wealth fund, but the prince, who heads its board, runs it like his own business. In April, it acquired 129 square miles of state land for a sports and entertainment city. In August, it announced plans for a tourist resort bigger than Belgium. And in October, Prince Mohammed unveiled Neom, his $500 billion robot city, at an international conference.
.. Far from diversifying wealth, he seeks to centralize it in his hands.
.. the Saudi economy dropped into recession more sharply than predicted in the last quarter. The gross domestic product dipped 0.7 percentin 2017, substantially down on pre-purge predictions of growth of 0.1 percent, and worryingly below population growth of 2 percent.
.. Saudi Arabia’s ranking on the World Bank’s ease of doing business index has fallen from 26 in 2014 to 92 in 2017. Unemployment continues to increase, in part because of the influx of women into the job market.
.. A direct sale to Chinese state-owned oil companies is also being mentioned.
.. Investors and neighbors crave predictability, stability and the confidence that comes with a sound regulatory system. All three are what made Dubai. Properly carried out, such a system would please bankers who might welcome the chance to retrieve debts or land from princes that act like robber barons.
.. A new House of Lords would lessen the risk that wounded egos will spawn an opposition. Subject to his elders’ scrutiny, the crown prince might be more prudent about spending money, particularly on defense and security, which documents indicate was 43 percent over budget in 2016.
.. For now Prince Mohammed is offering more personal liberty and relief from the scowls of the religious police as compensation for the introduction of taxes.
But as Abdullah, the previous king, recognized, more taxation — whether direct or indirect — will stoke demands for broader representation.
History suggests that the next recession is not far off. The current expansion, though relatively weak, has been steady since June 2009, making this the third-longest upward climb on record. Juiced by the tax cut, the United States is on track to record 107 months without a recession in April, passing the boom of the 1960s in duration. That will leave only the decade-long, 120-month run in the 1990s — when the end of the Cold War met the rise of the Internet to create a Golden Age for the U.S. economy — to be beaten.
.. Trump might ask George H.W. Bush what it’s like to have a recession arrive during a reelection campaign.
.. By delaying the inevitable, Trump’s tax cut may prove to be a double-edged sword. The recession that might have arrived in 2018 and passed like a summer storm will likely be shoved back a couple of years. If the piper presents his bill in the midst of Trump’s reelection campaign, the president better look out, because Democrats going back to John F. Kennedy score their wins when Republican presidents stumble into late-term economic woes.
.. Perhaps Trump should have followed Ronald Reagan’s example, accepting a recession early in his first term and trusting the recovery would come in time to lift him to reelection. That option is gone now. Having juiced the economy with tax cuts, Trump must either find a way to skim the froth — prod the Fed for rapid rate increases? unsettle the world with ill-advised trade wars? — or cross his fingers and power through. My prediction is that he’ll throw open the government’s liquor cabinets and pour out every stimulating drop he can get his hands on in a desperate effort to keep the party going through 2020.What a morning-after that is likely to be.