The sunset over the Madrid towers, on Sept. 8.THOMAS COEX/AFP/Getty Images
John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
For anyone feeling gloomy about the state of the Canadian economy, there’s at least the consolation that the country is in good company. As we enter an anxious fall amid an American election that could have an outsized impact on the world, much of the global economy is sputtering.
It’s not that there aren’t parts of the world doing well. Much of the developing world is experiencing strong growth, with economies in Southeast Asia, India and much of Africa expanding at rates we in the West haven’t seen in generations. Meanwhile, though Latin American economies rarely dazzle, two of the big players, Brazil and Mexico, are for the moment doing respectably.
However, while the day will come that these economies are sufficiently big to help lift global growth, that day remains well off. In the meantime, the three major growth poles of the world economy, in Europe, the U.S. and China, are all slowing quickly.
Europe’s rebound from its postpandemic lows is so slight as to barely be noticeable. Although Eastern Europe is moving forward at a rate of about 3 per cent a year, the continent’s overall performance is weighed down by the general gloom in the big Western economies of Britain, France, Italy and Germany, all of which are pretty much flatlining in real terms.
Meanwhile, as last week’s employment report revealed, the American economy is finally slowing down. But China is looking most sickly of all. Even though it’s growing faster than the U.S. or Europe, it’s doing so from a lower base and at a slower rate than the regime’s 5-per-cent target. Prices are deflating and there’s a risk firms may start laying off workers to cut costs.
All those slowdowns have raised hopes among investors that central banks will cut interest rates aggressively, stimulating rebounds. The U.S. Federal Reserve is widely expected to cut rates next week and when it does, it will join the major banks of all the G7 economies – with the exception of Japan – in starting its rate-cutting cycle (and even Japan has said it will hold off further major tightening, at least for the time being).
But as revealed in recent inflation reports, most notably the one that came out on Wednesday in the U.S., inflation is slowing but isn’t yet licked – if by licked, we mean that central banks have hit their 2-per-cent target. Headline inflation has come down everywhere, but core inflation – the underlying trend in prices after one strips out the most volatile items such as food and energy – is generally staying closer to 3 per cent than 2 per cent.
Besides, although Canada’s job market is slowing, elsewhere in the West unemployment remains fairly low and real wages are rising. Given the persistent slump in productivity growth in most developed economies, firms could compensate by raising prices further, restoking inflation.
So unless central banks revise their inflation targets upward, which they show no appetite of doing, interest-rate cuts are likely to prove more gradual and less deep than hoped. That, in turn, will temper any economic rebounds. Thus, the best hope for a strong renewal of growth likely lies in China. For the moment, the regime is trying to re-energize the economy by stimulating manufacturing output. However, amid softening demand, the added output is merely worsening the country’s deflation problem. In the absence of a boost to consumption, growth will probably continue slowing.
Although the leadership is resisting major demand stimulus, given how talismanic the 5-per-cent growth target is to the ruling Communist Party, there’s a chance it may cave and engage in some sort of year-end spending program. If so, China could end up rescuing the West as it did after the 2008 financial crisis, when its huge stimulus program did much to boost the world economy.
In the meantime, anxiety will likely rise as the world watches and waits for the result of the American election. Market volatility will likely keep rising, and swollen asset values, especially in the U.S. stock market, are at risk of a fall. Not only is there a lot of uncertainty over the future course of economic policy, with the Donald Trump and Kamala Harris campaigns proposing radically different agendas, but there’s equal uncertainty over how Mr. Trump will respond if he loses.
But one thing looks set to cloud the outlook for developed countries, regardless of the U.S. election outcome. Almost everywhere, sentiment is turning hostile to immigration, and several countries are trying to reduce their numbers of new arrivals. Given labour shortages, this is likely to boost wages. That will be good for workers and could support continued, if sluggish growth. However, better wages will translate into either lower profits or higher prices, which could further slow declines in interest rates.
Neither outcome would be good for asset prices. Therefore, this may well shape up to be a fall of drama in the markets.