For the past few years, the global economy has been oscillating between periods of acceleration (when growth is positive and strengthening) and periods of deceleration (when growth is positive but weakening). After more than a year of acceleration, is the world heading towards another slowdown, or will the recovery persist?
One can envision three possible scenarios for the global economy in the next three years or so. In the bullish scenario, the world’s four largest, systemically important economies – China, the eurozone, Japan and the US – implement structural reforms that increase potential growth and address financial vulnerabilities. By ensuring that the cyclical upswing is associated with stronger potential and actual growth, such efforts would produce robust GDP growth, low but moderately rising inflation and relative financial stability for many more years. US and global equity markets would reach new heights, justified by stronger fundamentals.
In the bearish scenario, the opposite happens: the world’s major economies fail to implement structural reforms that raise potential growth. Rather than using the national congress of the Chinese Communist party this month as a catalyst for reform, China kicks the can down the road, continuing on a path of excessive leverage and overcapacity. The eurozone fails to achieve greater integration, while political constraints limit national policymakers’ ability to implement growth-enhancing structural reforms. And Japan remains stuck on its low-growth trajectory, as supply-side reforms and trade liberalisation – the third “arrow” of Shinzo Abe’s economic strategy – fizzle out.
As for the US, the Trump administration, in this scenario, continues to pursue a policy approach, including a tax cut that overwhelmingly favours the rich, trade protectionism and migration restrictions, which may well reduce potential growth. Excessive fiscal stimulus leads to runaway deficits and debt, which results in higher interest rates and a stronger dollar, further weakening growth. Trigger-happy Trump could even end up in a military conflict with North Korea, and, later Iran, diminishing US economic prospects further.
Reference: The Guardian
Read more: https://www.theguardian.
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