Should we be concerned about the state of the world economy? Yes: it always makes sense to be concerned. That does not mean something is sure to go badly wrong in the near future. On the contrary, the world economy seems to be heading into just a mild cyclical slowdown. Far more important is the adverse longer-term structural and cyclical context because it makes any short-term swing far more perilous.
According to Goldman Sachs, the momentum of global economic growth slowed markedly in 2018. The most globally significant slowdown has been in the Chinese economy— the main engine of global growth since the financial crisis of 2007-08. But Germany and Japan also recorded economic contractions in the third quarter of last year. Stock markets have also been in turmoil. In part, that presumably reflects worsening perceptions of prospects. These falling markets should also weaken consumption and investment.
All this suggests a cyclical slowdown is on the way. Yet conventional forecasters are hardly unduly worried. The OECD stated last November that the “global expansion has peaked” and that global gross domestic product growth is “projected to ease gradually from 3.7 per cent in 2018 to around 3.5 per cent in 2019 and 2020, broadly in line with underlying global potential output growth”. This would be an ultra-soft landing. Consensus forecasts support this: the December consensus forecasts for growth in 2019 are little different from those made a year ago. Growth prospects for the US are even slightly upgraded. (See charts.)