published Jul 15, 2018 6:00:15 PM, by Daniel Moss
(Bloomberg Opinion) —

That was the high point?

We’ve probably seen the best of global growth for this cycle, but the peak wasn’t marked by the traditional catalysts for a slowdown like higher interest rates or a financial blowup. Instead it’s a different scene in each of the biggest economies — with the U.S. powering ahead, Europe and Japan drifting after a stellar year, and China trying to thread the needle between flushing debt and not choking its expansion. Add to that political disunion in Europe, trade conflict and a stronger dollar that’s taking the wind out of emerging markets.

The trade war between the U.S. and China is the most dangerous because it’s likely to ricochet widely. Trade tussles are also toxic because central banks don’t have an easy way to ameliorate their damage.

I’m not talking about a recession (yet). There is a distinctly cooler air to the global economy than even a few months ago when the “synchronized upswing” of 2017 began to fall out of sync. But why the dampness in the atmosphere now?

Not faster or slower inflation. We know what those look like. Cooling prices? Nope. Bank and market explosions? Not this time. With big banks stress-tested every year, officials and markets have a better sense of what they are dealing with then they did before the 2007-2008 crash.

Policy makers are well-prepared for the last war. But a trade spat isn’t something many policy makers or executives have dealt with in their professional lives.

A full-blown trade war would slice 0.4 percentage points from world growth, according to Bloomberg Economics. (The world economy expanded about 3.7 percent in 2017.) Nomura eyes 3.7 percent in 2019, down from 4 percent this year, and believes global growth has peaked. The European Union has cut its projections to 2.1 percent from 2.3 percent, which was itself a prediction made just a few months ago. In China, tariffs already in place won’t mean a huge hit to top-line growth, but escalations could easily mean about half a percentage point.

(America is probably in the best shape. Federal Reserve Chairman Jerome Powell told American Public Media’s “Marketplace” program that he sleeps pretty soundly. But the interview couldn’t be complete without a flare about what a protracted period of widespread higher tariffs might do.)

Those aren’t calamitous numbers. Together with their causes, they do represent a new phase in the eight-year expansion. It’s mostly a self-inflicted wound, from political actions in the U.S. and Europe.

It’s almost enough to make one nostalgic for inflation and bank runs.

To contact the author of this story: Daniel Moss at dmoss@bloomberg.net
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