In 2017 economic growth increased in all of the large developed economies, with the exception of Britain, and also increased in most of the emerging economies.
According to The Economist, in 2018, the world's economic problem is that growth momentum has become uneven.
In the U.S., the Trump Administration's tax cuts have provided a boost, raising the annualized rate of quarterly growth to above 4%, and further reducing unemployment to its lowest level since 1969.
Forecasts from the IMF now have growth from every other of the largest economies slowing this year, except the U.S.
In response to Trump's trade war against it, China has eased monetary policy to help bolster its economy.
It would also not be that unusual for economic growth in the U.S. to experience a shallow recession, as interest rates rise and fiscal stimulus declines, particularly after a decade of growth.
Its possible for countries with large debt burdens to able to benefit fiscal stimulus during recessions. In the U.S., there is a greater willingness in to spend, however, in the past year, economic policy increased America's deficit to over 4% of GDP, at a time when the economy was already running hot. As a result, the political will and unity to do so might not be there to spend when and if a recession occurs.
In addition, the Fed's swap facilities with other central banks, which allows them to borrow US dollars, have the potential to become a problem.
To wit, that leaves the pushing up of interest rates over time, further [therefore, accelerated rate hike schedule, but at what cost?], as a result of raised inflation targets, to provide more room [dry powder] for rate cuts, and that could turn out be the valuableĀ [its only] option in the Fed's toolbox down the road.
Historically, however, the Fed has on average dropped rates by 5% as a measure of monetary stimulus, however, at this point, it only has half as much room before it gets to zero. The Eurozone and Japan have no room at all as they are still at zero.
In the Eurozone, the problem is far worse as they have no breathing space as their policies on QE are constrained [maximum per country debt purchases of 33%], and, because the Northern European countries are afraid of defaults, as they fear they would be left holding the bag, they have put curbs in place against fiscal policy to restrain 'profligacy.' [Bottom line: the ECB is hamstrung of its own making]
Taking action now could avert the dangers of an inescapable recession:
[Easier said than done] This week's volatility in markets shows that the political initiative to take pre-emptive action is 'conspicuously absent.'1) If they established a commitment ahead of time to make up lost ground when inflation undershoots or growth disappoints, expectations of a catch-up boom could provide an automatic stimulus in any downturn.
2) Alternatively, raising the inflation target today could over time push up interest rates, giving more room for rate cuts.
3) Future fiscal stimulus could be baked in now by increasing the potency of āautomatic stabilisersāāspending on unemployment insurance, say, which goes up as economies sag. The euro zone could relax its fiscal rules to allow for more stimulus.
This may be the time, while it is still possible, for the world to start preparing for the next recession [rather than reacting to it when it is already too late to get out the toolbox].
