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Take a snapshot of the Canadian economy this week. What you’ll see, at least on the surface, is a land bathed in sunshine. Unemployment is near a record low. Second-quarter gross domestic product figures to be released on Friday will likely show annualized growth of close to 3 per cent. Inflation is low.

Today’s weather: clear skies and above-seasonal temperatures. Tomorrow’s economic forecast: chance of heavy thunder showers.

The fears come from several sources. Most immediate among them is an escalating trade fight between the U.S. and China. The issue played out over the past weekend as the Group of Seven countries met in France. The G7 came on the heels of the annual symposium of central bankers and other financial leaders at Jackson Hole, Wyo. The possibility of a full-blown trade war loomed over both gatherings.

Also weighing on minds at both meetings: a bond market that may be signalling a global recession.

Bond yields have fallen dramatically across the world this year. Yield curves have also inverted; money can be borrowed for long periods of time at interest rates below short-term loans. That only happens when investors are extremely pessimistic about the future.

On Tuesday, the yield on the Canadian 10-year government bond fell to just 1.13 per cent, and U.S. 10-year Treasuries fell to less than 1.5 per cent. Both yields have been cut in half since last fall, are now close to record lows and below levels seen during the 2008 financial crisis.

In Europe, the signs are even more worrisome. The German government can borrow for 30 years at a rate of -0.19 per cent. Bond holders are paying for the privilege of giving their money to Berlin.

Those signs normally signal a recession. And if that is what’s coming, central bankers have a tried-and-true response in their monetary policy arsenal: They can lower short-term benchmark interest rates. That’s why the U.S. Federal Reserve cut its interest rate by a quarter percentage point earlier this month.

But with interest rates already close to zero in much of the developed world, the concern is that central banks are going into the next recession with few bullets left in the chamber. Or as economist and former U.S. Treasury secretary Lawrence Summers recently put it, “the impact of interest rates on aggregate demand has declined sharply" and "the marginal impact falls off as rates fall.”

Mr. Summers is not alone in wondering if traditional monetary policy is no longer sufficient or available. Jean Boivin, former deputy governor at the Bank of Canada and now an advisor at investment firm BlackRock, wrote earlier this month that, “there is not enough monetary policy space to deal with the next downturn.”

In Canada, where the central bank has room to lower interest rates, the worry is that such a step would merely drive up the price of assets such as homes, while doing little for the real economy. The Canadian economy, in any case, is firing on almost all cylinders and at close to full employment.

But if traditional monetary policy isn’t the answer, what about traditional fiscal policy – the stimulus of more government borrowing and spending?

In some ways, the world appears perfectly positioned for just that. Today’s ultralow bond yields are the product of too much savings chasing too few investment opportunities. For sovereign borrowers such as Canada, money has never been cheaper. Investors are willing to lend Ottawa their money for decades and, in inflation-adjusted terms, get back less than their original principal.

But a globe awash in money is also heavily indebted. The Government of Canada isn’t, but Canadian consumers are, as are governments in much of the rest of the developed world. A short-term boost in government spending and borrowing more to invest in areas such as infrastructure, would not be a fiscal problem for Canada. But other countries don’t appear to be in the same boat. Washington, for example, is already on track for trillion-dollar deficits.

Responding to a downturn will call for creativity and international co-operation. Creativity is never in short supply; Mr. Boivin and his colleagues have floated the idea of a new kind of emergency fund.

But international co-operation? In 2019, that could be a challenge. Maybe the bond market is right to worry.

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