The year that is ending witnessed a remarkable economic performance. It began with robust growth in all the world’s major developed and developing economies. Politicians rejoiced as just-released figures for the third quarter of 2017 showed that Japan’s economy grew an annualized 2.5 percent, the U.S. expanded 3.3 percent, China grew 6.9 percent and India’s economy expanded 6.3 percent, to name but four top performers. It is concluding, however, with plunges in markets worldwide and widespread expectations that 2019 could be the worst year since the Great Recession of 2009. Policymakers must begin preparing for the anticipated downturn, ensuring that they have the tools to respond. In some cases, that means ignoring the fulminations of politicians whose interests are more short-term and whose preferences could prove dangerous.
The end of the year is traditionally a time for markets to gain ground, but Wall Street appeared to be on track to have its worst December since 1931 — until Wednesday’s big rally. Many sectors have fallen 20 percent, entering what is officially a “bear market.” In Tokyo, the Nikkei 225 average remains well below where it ended the previous year. Markets elsewhere in the region have been similarly battered: Shanghai has lost 25 percent of the value of its composite index, while that in Hong Kong is 10 percent off.
More than half the fund managers in one global survey said they expect the global economy to weaken in the year ahead, the worst outlook since 2008. The International Monetary Fund has already cut its global growth forecasts — and there are warnings it will do so again in January — and economists who anticipated a recession in 2020 now fear it may arrive next year instead.
For U.S. President Donald Trump, this sorry state of affairs is attributable to the misguided efforts of Jerome Powell, chairman of the U.S. Federal Reserve. Trump tweeted last week: “The only problem our economy has is the Fed,” complaining that “They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders.” The Fed’s decisions to gradually raise interest rates throughout the year and unwind its quantitative easing program have infuriated the president — who sees the market as the best indicator of his economic performance — reportedly prompting him to speculate about removing Powell, the man he handpicked for the job earlier this year.
Recognizing that those reports were fueling market instability, Treasury Secretary Steven Mnuchin knocked them down last week, saying that Powell had the president’s support. The Treasury secretary then created new fears by announcing that he had called the heads of the six largest U.S. banks, and that they had assured him they had ample liquidity — a problem that no one had anticipated (and liquidity is one of the few areas in which analysts are confident bank positions have improved over the last decade). As one analyst concluded, “He went to the heart of the economy’s strength and created doubt.”
Those looking for warning signs have a long list to consider. The top concern for most investors is a trade war between the U.S. and China, the world’s two largest economies, while Japanese investors and businesses also worry that Washington will pick a similar fight with Japan. The consumption tax hike next October and fears that it could once again dampen consumer demand are additional sources of uncertainty here. The end of quantitative easing is also generating concern. Elsewhere, there are China’s slowing economy, the prospect of a no-deal Brexit with catastrophic consequences, economic troubles in Germany and Italy while France experiences yet more political turmoil, and instability in the Middle East.
In the U.S., a long list of political risks is generating anxiety: the government shutdown, how Trump will react to a divided Congress and the investigations into his administration, family and businesses that will follow, and a general perception that the government does not have the people or the talent to deal with crises.
When the global financial crisis struck in 2007-2008, the U.S. government was populated with internationally acknowledged experts and professionals; today many key positions in Washington remain unfilled and those that are occupied do not enjoy the same level of trust and respect. It is in this context that the Mnuchin comment about bank liquidity assumes outsize significance.
The economy may be slowing and the Fed might need to reconsider its determination to raise interest rates, but its board is anticipating challenges to come. They, like other economic policymakers, need tools to deal with crises. Raising interest rates now means they can lower them in times of trouble. There are other prudent steps to take, but the most important is taking a longer-term view, acknowledging mounting headwinds and putting national interests above short-term political concerns.
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