Is the global economy showing signs of growth or catastrophy? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
The global economy is clearly slowing. The IMF just cut its forecast for global growth again yesterday. One main reason for this weaker growth is the increase in uncertainty. One source of uncertainty related to trade tensions around the world. Businesses abroad are wondering what the trading arrangements of the future will look like and this increasingly uncertain environment is holding back investment and lowering trade activity. As a result, several countries have experienced recent declines in manufacturing activity, which is more sensitive to global trade. A second source of uncertainty, particularly for Europe, is Brexit. But Europe is also slowing because of weaker activity in its automotive industry, which partly reflects new regulations and households decisions to postpone purchases of big-ticket items in a more uncertain environment.
One issue is that interest rates in some countries are already very low or even negative, so that lowering interest rates further may be insufficient to boost growth. Interest rates cannot be much lower than zero, since people will ultimately prefer to hold cash at home than to pay to hold it in a deposit account at a bank. Monetary policymakers can use other, so-called unconventional, tools like communication and purchasing assets (QE), to stimulate the economy. But the balance sheet of some central banks is already very large, limiting the scope for additional unconventional policies. Fiscal policy could in principle fill this gap, but several foreign countries have already elevated debt, limiting the extent to which expansionary fiscal policies could be deployed. Thus, it's important to reduce the amount of trade-related tensions facing the world economy, given the limited amount of policy space.
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