Why you should care
Because the global downturn is coming no matter what.
This is an OZY Special Briefing, an extension of the Presidential Daily Brief. The Special Briefing tells you what you need to know about an important issue, individual or story that is making news. Each one serves up an interesting selection of facts, opinions, images, and videos in order to catch you up and vault you ahead.
WHAT TO KNOW
What’s happening? Slowing factory output in China. Economic contraction in Germany. Decade-low global vehicle production. Although few can agree which indicator most accurately gauges the temperature of the global economy, it seems clear it’s headed for trouble. Several months ago, observers were wondering when the next global recession would hit. Now, they’re asking: What do we do when it does?
Why does it matter? The global financial downturn of 2007-08 started in the U.S. and spread around the world. Chinese consumers, with their voracious spending habits, were largely credited with pulling the world out of the resulting slump. This time, China’s economic struggles are among the chief indicators suggesting a looming crisis — with all eyes on American consumers to come to the rescue. Sure, U.S. growth is also slowing, with the economy posting a mere 2.1 percent bump during the most recent quarter. But it still enjoys rock-bottom unemployment and robust consumer spending. Now it’s up to President Donald Trump to make sure his trade war with China doesn’t push the U.S. over the edge.
HOW TO THINK ABOUT IT
Signs abound. Germany’s 0.1 percent contraction last quarter and China’s 17-year-low factory output pace were enough to spook global markets. But multiple other major nations are also seeing negative growth, and could be headed toward a recession. The British economy, for instance, shrank 0.2 percent last quarter after an unimpressive first quarter of meager growth. The economies of South Korea, Brazil and Singapore contracted in the last quarter. Then there’s sluggish motor vehicle manufacturing, which dipped 1 percent globally last year for the first time since 2009. In India — which is still growing — auto sales fell nearly 19 percent last month to a 19-year low, and a million jobs in the auto-components sector are now at risk there. This is bad news because the value chain powered by auto manufacturing — ranging from raw materials and energy to labor and marketing services — is fundamental to the global economy.
A silver lining? Fears boiled over this week when U.S. markets slumped and long-term treasury bond yields weakened. But while Wall Street investors might be jittery, America’s shoppers apparently aren’t. Retail sales jumped 0.7 percent month-on-month in July — a heartening indicator considering that consumer spending comprises some 70 percent of American economic output. “The consumer has played Atlas, carrying the economy,” one analyst told CNBC. But to continue doing that, they warn, people need to stay employed. That’s where current unemployment and wage gain rates, which hover at 3.7 percent and 3.2 percent, respectively, provide encouragement.
Eyes on the prize. Still, most analysts agree that American consumers can’t prop up the global economy on their own. They say it’s up to President Trump and his Chinese counterpart, Xi Jinping, to hash out a trade deal. For now, confident consumers and steady growth might encourage Trump to continue daring both China on tariffs and the Federal Reserve on further cutting interest rates. But that’s a dangerous game, since shoppers appear poised for a hit, even if delayed by a few months, when new tariffs on popular Chinese goods like clothes, electronics and toys finally arrive. The longer the trade war goes on, the more it fuels a vicious cycle that has already damaged the global economy — and could eventually harm the U.S. But then, who’ll be left to rush to the rescue?
WHAT TO READ
How World Leaders Ruined the Global Economy, by Steven Rattner in the New York Times
“The deterioration in the economic picture is not the consequence of irresponsible behavior by banks or a natural disaster or an unanticipated economic shock; it’s completely self-inflicted by major world leaders who have delivered almost universally poor economic stewardship.”
Consumers to Bond Market: What, Me Worry? by Justin Lahart in the Wall Street Journal
“Fed policy makers are skeptical of the yield curve’s precision as a forecasting tool but, given their worries about their ability to combat a recession in a low-rate environment, they probably don’t want to take any chances.”
WHAT TO WATCH
Markets in Turmoil Amid Recession Fears
“While that might sound scary, it might also present some opportunities for consumers.”
Watch on CBS This Morning on YouTube:
Is the World Heading for a Recession?
“We are tapped out on what we can do with monetary policy, and we need fiscal policy now to step in and really create a new growth story.”
Watch on Financial Times on YouTube:
WHAT TO SAY AT THE WATERCOOLER
Good to be young. In the current economic turmoil, experts say, millennials probably have it better than baby boomers. Lower interest rates mean it costs less to borrow — which young people tend to do more — but they also mean retirement savings lose value over time because they make future spending more expensive.