'Vulnerabilities stemming from China and the weakening European economy, combined with a slowdown in trade and global manufacturing, high policy uncertainty and risks in financial markets, could undermine strong and sustainable medium-term growth worldwide,' the OECD said.Sean Gallup/Getty Images
A decade after Wall Street hit its maximum level of pessimism, the global economy is once again feeling a cold breeze on its neck.
The Organization for Economic Co-operation and Development cut its outlook for growth on Wednesday, pointing to “major risks,” particularly in Europe. Also on Wednesday, the Bank of Canada acknowledged the current weak patch is likely to last longer than expected.
Meanwhile, the Trump boom is fading. Economic growth in the United States is now limping along at an annual pace below 1 per cent, according to the latest Nowcast estimates from the Federal Reserve Bank of New York.
The flurry of downbeat readings comes exactly a decade after the S&P 500 hit its lowest level during the financial crisis, on March 6, 2009. That is just a coincidence, of course. But it does underline the ways in which today’s market could wind up being just as treacherous for investors as the one a decade ago.
On the good-news front, no one expects a replay of the financial crisis. Big banks are more robust than they were before 2009, housing bubbles are not as widespread. In its latest forecast, the OECD projects the global economy will grow by 3.3 per cent in 2019 and 3.4 per cent in 2020 – less than it expected a few months earlier, but still a decent rate of expansion.
However, there are plenty of threats. “Economic prospects are now weaker in nearly all G-20 countries than previously anticipated,” the OECD said. “Vulnerabilities stemming from China and the weakening European economy, combined with a slowdown in trade and global manufacturing, high policy uncertainty and risks in financial markets, could undermine strong and sustainable medium-term growth worldwide.”
The most significant risk for investors – and for the broader economy – is that governments and central banks have only limited ability to push back against a slowdown. A decade of low rates and unconventional stimulus measures has depleted the standard policy prescriptions.
Cutting interest rates, for instance, is no longer the panacea it once was, because rates have stayed low ever since the financial crisis. Central banks have only limited room to reduce them further before rates hit zero.
This limits the stimulus that central banks can deliver, at least through conventional channels. Over the past five decades, the Federal Reserve has typically slashed interest rates by five percentage points in a downturn. With its key rate now at 2.5 per cent, the U.S. central bank can cut by only half that amount before it runs out of ammunition. The Bank of Canada has even less room to reduce rates, and the Bank of Japan and the European Central Bank have no room at all.
How about more government spending? That might be an excellent idea, especially in notoriously tight-fisted Germany, but many countries spent big during the crisis, and are already carrying mountains of public debt. “From 2008 to mid-2017, global government debt more than doubled, reaching US$60-trillion,” according to a recent McKinsey Global Institute report.
All this suggests any future downturn could be substantially tougher to emerge from than the previous one. Stock markets, though, do not seem to be registering any concern. In both Canada and the United States, share prices have rebounded strongly in recent weeks and are now close to their previous peaks.
Investors may be placing too much confidence in policy-makers’ ability to bail them out of any trouble that may develop. It is easy to understand why they may be confused on that score.
When the S&P 500 slumped to the biblically ominous level of 666 on March 6, 2009, Washington was already rushing to restart the economy with a dizzying array of crisis-era measures. Since then, the benchmark has more than quadrupled.
Many investors appear to be assuming that any future weakness will be met with an equally vigorous response. That is far from a sure thing, especially given the political hurdles that would have to be surmounted.
“Any slowdown is likely to require governments to shoulder a higher debt burden and central banks to delve further into their unconventional policy toolkit,” writes Neil Shearing, group chief economist at Capital Economics. “What’s more, the deeper the downturn, the further they’ll have to go. It’s possible that this could run into political or institutional resistance.”
Ian McGugan