Understanding Risks to Global Growth

"If a lamplighter could see the world today, he would think the prosperity all around him was unimaginable." –Sam Altman

dickensfair.com

All eyes were on the Federal Reserve last week, and the unexpected 50 bps cut in the funds rate. Markets have reacted positively, as cheaper money is advantageous both for companies and for the consumers they serve. But are there reasons to be wary—did this cut mean that the FOMC is trying to get in front of a looming recession?

There are some negative economic indicators that could be pointing that way, including the Sahm Rule and the contraction of the M2 money supply. Due to recent geopolitical events, there has been a lot of gloom and doom lately as well. In reality, the recovery from a worldwide pandemic and shutdown has been far more rapid than the slow crawl that followed the Global Financial Crisis.

Outliers include Germany, where multiple policy failures have come home to roost, resulting in a flat GDP growth rate in spite of the exorbitant advantage the euro has given its export-led economy. But overall, the world economy is still expanding, even in the face of demographic declines in many advanced nations.

Given an apparent bias towards the negative, it just as important not overestimate risk as it is to ignore it. Either could lead to significant errors in decisionmaking. The current pessimism feels overdone. Negative information is delivered constantly; in fact the business model of the media incentivizes it. Humans do not do a good job of evaluating risk even in the best of times. During periods of uncertainty, the failure rate is high. And we are just coming to grips with China’s changing role.

@MacroAlf