GLOBAL ECONOMY With the benefit of full-year data, only now are we becoming aware of the danger the global economy narrowly avoided in 2019. According to the International Monetary Fund’s latest estimates, world GDP grew by just 2.9% last year – the weakest performance since the outright contraction in the depths of the global financial crisis in 2009 and far short of the 3.8% pace of post-crisis recovery over the 2010 to 2018 period. On the surface, 2.9% global growth doesn’t appear too shabby. But 40 years of perspective says otherwise. Since 1980, trend world GDP growth has averaged 3.5%. For any economy, including the world as a whole, the key to assessing growth implications can be found in deviations from the trend – a proxy for the so-called output gap. Last year’s shortfall from trend (0.6 percentage points) brought growth uncomfortably close to the widely accepted global recession threshold of approximately 2.5%. Unlike individual economies, which normally contract in an outright recession, that is rarely the case for the world as a whole. We know from the IMF’s extensive coverage of the world economy, which consists of a broad cross section of some 194 countries, that in a global recession about half of the world’s economies are typically contracting, while the other half are still expanding – albeit at a subdued pace. The global recession of When world output growth slips to the lower half of that range, the risks of global recession need to be taken seriously.
a decade ago was a notable exception: By early 2009, fully three-quarters of the world’s economies were actually shrinking. That tipped the scales to a rare outright contraction in world GDP, the first such downturn in the overall global economy since the 1930s. For global business-cycle analysts, the 2.5% to 3.5% growth band is considered the danger zone. When world output growth slips to the lower half of that range – as it did in 2019 – the risks of global recession need to be taken seriously. As is typically the case for official or institutional forecasts, the IMF is projecting a modest acceleration of annual world GDP growth in 2020 and 2021 to 3.3% and 3.4%, respectively. But as the physicist Niels Bohr once said, “Prediction is very difficult, especially if it is about the future.” Just ask the IMF, which has revised down six consecutive iterations of its global forecast. Obviously, there is no guarantee that its latest optimistic projection will be realized. Downside risks are especially worrisome because a 2.9% growth outcome for the world economy underscores the lack of a comfortable cushion in the event of a shock. As I noted recently, predicting shocks is a fool’s game. Yet the draconian measures that China is now taking to contain the lethal Wuhan coronavirus only serve to remind us that shocks are far more frequent than we care to think. A few weeks ago, it was the possibility of a hot war between the United States and Iran. And before that, there was the increasingly contentious U.S.-China trade war. The point is that below-trend global growth, especially when it moves into the lower half of the 2.5% to 3.5% range, is nearing
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February 2020
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