The fast resurgence in risk assets in January has followed significant policy changes by the US Federal Reserve, the Trump administration and the Chinese authorities. These efforts have lessened the markets’ sense of recession risks, even as economic data have proceeded to diminish.
No lesser a personality than the chairperson of the Federal Reserve, Jay Powell, himself has correlated the prevailing condition to that in early 2016, when a respite in US monetary tightening, and a Chinese stimulus, unleashed a considerable expansion of the equity bull market. Global equities rose by roughly 50 percent in 2016 and 2017 combined. Could anything comparable happen again?
There are parallels between today’s overall economic situation and that in early 2016. Then, markets were in meltdown because activity data in the US and China were both weakening markedly, deflation risks were escalating, and the policy response from the Fed and the Chinese authorities was postponed and incomplete.
Some important economic forecasters were envisioning a world recession within 12 months. The latest activity data from the US have not ultimately arrived at the low points witnessed in 2016, but China has returned to the lows. Forecasts for both economies are still dropping and the Eurozone is also exploring new depths. At Davos a few weeks back, the IMF downgraded projections for global growth and cautioned about contracting forces taking hold.
Yet, the global picture for economic growth seems analogous to three years ago. Many observers believe global recession risks are significant because aggregate demand will dwindle away as the causes of secular stagnation reassert themselves.
To what degree will policy be effective to counteract the contraction forces that have taken hold in recent months? The answer depends on developments in three key areas: the US and Chinese macroeconomic policy, and international trade policy. Which overall seems less well placed to ameliorate the economic downturn than it was in 2016.