For much of the past several months it has been almost impossible to open the pages of any business section, or skim through any article on current economic events, without encountering the same ominous phrase: global economic slowdown.
The quickness with which this new buzzword has crept its way into the centre of the public conversation offers a striking illustration of the general mood in the financial world at present, especially outside the relatively lively U.S. economy. Whatever might be said about the shallowness of Keynes’ “animal spirits” interpretation of the causes of business cycles, it is difficult to shake the impression that a general, intangible economic pessimism has been a major reason why “global economic slowdown” — a phrase which has often been explained and justified only very vaguely — has so readily been adopted as the default prediction for 2019’s economic outlook.
However, the seemingly instinctive eagerness of pundits to adopt the phrase has sometimes left its true meaning and import under-explored, leaving open several key questions: What really is the global economic slowdown? What are its causes? And could it be a precursor to the next crisis?
The first thing to note about the new “global economic slowdown” buzzword is that, at least at present, it is for the most part a prediction that the coming months will bring slow or stagnant growth, rather than an assertion that we’re currently back in full blown crisis conditions. This partly accounts for the choice of softer language in its name: “slowdown” certainly has a somewhat less apocalyptic timbre to it than “recession” or “crash.”
However, it is no coincidence that predictions of a more pronounced slowdown have been on the rise over the past few months, given the noticeable stuttering of the global economy since the end of 2018. Even in the U.S. economy, consumer spending in December 2018 exhibited its greatest drop since 2009, with personal income falling for the first time in three years in January, and factory activity hitting a two-year low in February. All of this contributed to a predicted annual growth rate of just 0.5% for the first quarter of 2019, and a flatlining dollar since the end of 2018. The outlook is even worse outside the relative oasis of prosperity that is the U.S. economy at present. Both Britain and the Eurozone grew by just 0.2% in the final quarter of 2018, Italy has entered its fifth recession in two decades, and recent news of a major German manufacturing slump suggests more dark clouds on the horizon for the European economy. In light of this dismal backdrop, it is easy to understand how economic analysts have so easily slipped into their current predictions of a significant worldwide slowdown for the remainder of 2019.
So what has caused this worldwide weakening of growth, which so many are expecting to develop into a global economic slowdown? Most pundits have painted the situation as something of a perfect storm, with numerous factors from different regions having combined in a manner likely to produce a worldwide impact. The Chinese economic slowdown has been one of the most talked-about of these factors, especially after Beijing’s announcement that it will be cutting its growth forecast for the rest of the year, down to between 6% and 6.5%, compared with last year’s official figure of 6.6%. Chinese exports have also taken a significant hit since the beginning of the year, with February’s export figures suggesting a 20.7% decline compared with the same month last year, doubtless due in part to the ongoing tariff war between China and the US. The weakness of the European economy, mired as it is in the uncertainty surrounding Brexit amongst other factors, has also been cited as a millstone around the neck of the global economy.
However, the media focus on these individual symptoms risks drawing attention away from the slowdown’s underlying systemic cause: the past decade of artificially low interest rates. In the aftermath of the global financial crisis of 2007/8, central banks around the world responded by implementing near-zero interest rate policies, which they then maintained for an unprecedented length of time as the slump dragged on. In response to the tentative recovery of the past two or so years, however, numerous key central banks have begun the gradual process of normalizing interest rates once again. As Ludwig von Mises explained with his Austrian Business Cycle Theory, such an extended period of artificially low interest rates will have induced businesses into a myriad of ‘malinvestments’: risky, long-term projects which only appear profitable for as long as the unsustainably low interest rates persist. When the risk of runaway inflation eventually forces central banks to raise interest rates again, the new, higher cost of borrowing reveals that many of these projects cannot be completed profitably, forcing businesses to either significantly scale back their activities or face heavy losses, or both.
The timing of this current stutter in the global economy certainly seems to support the view that, in line with Mises’ theory, recent interest rate hikes have begun revealing the unsteady foundations on which the past few years’ recovery has been built. Sensing this, central banks around the world have been following the Fed’s dovish turn since January, reconsidering or outright reversing their previously planned interest rate hikes. However, such attempts to delay the inevitable readjustment can only result in even greater numbers of malinvestments being made in the meantime, with the result being that when the correction finally does arrive, a mere “global economic slowdown” may be the least of our worries.
George Pickering is a 2018 Mises Institute Research Fellow and a student of economic history at the London School of Economics.