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The Global Economy’s Wile E. Coyote Moment
The Global Economy’s Wile E. Coyote Moment
Photographer: Justin Sullivan/Getty Images
Our prediction last year of a global growth downturn was based on our 20-Country Long Leading Index, which, in 2016, foresaw the synchronized global growth upturn that the consensus only started to recognize around the spring of 2017.
With the synchronized global growth upturn in the rearview mirror, the downturn is no longer a forecast, but is now a fact.
The chart below shows that quarter-over-quarter annualized gross domestic product growth rates in the three largest advanced economies — the U.S., the euro zone, and Japan — have turned down. In all three, GDP growth peaked in the second or third quarter of 2017, and fell in the fourth quarter. This is what the start of a synchronized global growth downswing looks like.
Still, the groupthink on the synchronized global growth upturn is so pervasive that nobody seemed to notice that South Korea’s GDP contracted in the fourth quarter of 2017, partly due to the biggest drop in its exports in 33 years. And that news came as the country was in the spotlight as host of the winter Olympics.
Because it’s so export-dependent, South Korea is often a canary in the coal mine of global growth. So, when the Asian nation experiences slower growth — let alone negative growth — it’s a yellow flag for the global economy.
The international slowdown is becoming increasingly obvious from the widely followed economic indicators. The most popular U.S. measures seem to present more of a mixed bag. Yet, as we pointed out late last year, the bond market, following the U.S. Short Leading Index, started sniffing out the U.S. slowdown months ago. Specifically, the quality spread — the difference between the yields on junk bonds and investment-grade corporate bonds — has been widening for several months.
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Finding the Root Cause of Recessions
Finding the Root Cause of Recessions
Photographer: Gary Hershorn/Getty Images
The U.S. managed to avoid recession after the financial crisis, but Japan has succumbed to three contractions since 2009. Economic volatility is a key reason for this divergence, and that tells us a great deal about the risk of future U.S. recessions.
During this decade, both the U.S. and Japan have experienced multiple growth rate cycles, which consist of alternating periods of rising and falling economic growth. Japan had four growth rate cycle (GRC) downturns, three of which turned into recessions; the U.S. experienced three GRC downturns, none of which were recessionary. Why not?
In 2011, a Federal Reserve paper estimated the U.S. economy’s “stall speed,” below which it would plunge into a recession. U.S. growth promptly dropped below that threshold, yet no recession followed. So the concept — which seemed to have worked quite well since the 1950s — broke down and dropped out of the discourse.
Specifically, that estimate of the economy’s stall speed was 2 percent two-quarter annualized growth in real gross domestic income. In theory, the GDI is equal to real GDP, but is measured differently. While GDP adds up what the economy produces, such as goods and services, GDI sums up incomes, including wages, profits and taxes. The chart shows two-quarter annualized growth in real GDP for Japan (red line) and the U.S. (blue line), along with the 2 percent stall speed estimate
Most believe recessions are caused by shocks that then propagate through the economy. In contrast, our research shows that endogenous cyclical forces periodically open up windows of vulnerability for the economy, and that, once it is cyclically vulnerable, almost any exogenous shock can easily tip it into recession. Because such shocks tend to arrive sooner or later, an economy’s entry into a susceptible state is almost always followed by recession.
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