The world seems to have dodged recession, for now

Strong U.S. jobs growth and other global data suggest last year's panic was misplaced.

  • By Greg Ip,
  • The Wall Street Journal
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If the world was at risk of sliding into recession, policy makers appear to have pivoted in time to prevent it.

In the U.S., the slowdown never got started. March capped a quarter in which jobs grew as fast as they did in the fourth quarter. Growth in private hours worked, a better gauge of business labor demand, actually accelerated.

In the rest of the world, a rise in China’s purchasing managers index in March suggests its slowdown may be ending and a modest improvement in German industrial production in February sparked hopes for the same there. In sum, while recession fears haven’t entirely receded, the panic that gripped financial markets last year now looks misplaced.

That panic was sparked by two headwinds facing the world. First, global central banks and others were dialing back stimulus. The Federal Reserve raised interest rates four times while slowly shrinking its balance sheet and the European Central Bank prepared to follow suit. Chinese authorities reined in credit growth.

Second, political risk spread: Britain’s flailing effort to exit from the European Union has tanked business investment, and a financial backlash over budget-busting populism sent Italy into recession. Meanwhile, the Trump administration’s protectionist moves, especially against China, “wreaked havoc with world trade and global industrial activity,” independent economist Philip Suttle wrote in a note to clients.

The second set of risks persists, but the first is receding. The Fed signaled a halt to interest rate increases in January, helping stocks recoup last year’s losses. The only part of the real economy to wilt under higher interest rates was housing and it too is recovering. Since October, mortgage rates have fallen almost a full percentage point and new home sales have risen 21%. The ECB has begun easing again, and China has reopened the credit taps.

Jason Thomas, chief economist at private-equity manager Carlyle Group, says much of the global slowdown appears to have been a spillover from China. Authorities had deliberately sought to “de-risk” the economy, which showed up in slowing property development and flat prices. At the same time, household consumption abruptly dropped, an apparent reaction to the trade war with the U.S.

This, he says, spilled over to the eurozone. Consumer spending, he says, is growing around 2% a year, solid for the region, but total gross domestic product is only growing about 1%. About three quarters of Europe’s slowdown he attributes to exports, mostly to Asian countries that are part of China’s supply chain, plus knock-on effects on business investment. As China recovers, eurozone growth will probably return to 1.5% or more, he said.

The global recovery will probably pick up steam as the year progresses. Mr. Thomas said with the Fed on hold, central banks in India, South Africa, Brazil, Thailand and Indonesia can cut interest rates without worrying investors will dump their currencies. While last year’s tax cut will fade, the boost from higher federal spending on the U.S. has yet to be fully felt. Indeed, Mr. Suttle projects that among the seven main industrial economies, “fiscal policy in 2019 will be more uniformly expansionary than at any time since 2009.”

Yet this improved cyclical backdrop masks worrisome structural trends. Total private hours in the first quarter grew at roughly the estimated pace of GDP, suggesting worker productivity barely advanced. That’s bad news for wages, which over time reflect productivity. Manufacturing jobs, one of the bright spots last year, have stopped growing.

Ernie Tedeschi, an economist at Evercore ISI, an investment firm, said the jobs growth numbers don’t fully address worries about potential shocks to the U.S. from China or Brexit. But for now it isn’t adding up to recession. He said the data show the U.S., while resilient, is returning to the slower growth of about 2% pace that prevailed before last year’s fiscal boost.

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