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Japan’s Economy: Monthly Outlook (Jan. 2019)

What will bring an end to global economic growth?

Shunsuke Kobayashi

Yota Hirono

Summary

◆Outlooks for the global economy are being revised downwards one after the other. Some have begun to conclude that the more than ten-year growth period following the global financial crisis of 2008 is finally coming to an end and that the global economy will move into a slowdown by 2019 at the earliest. In this report we consider the sustainability of economic growth, and then closely analyze the situation from both the viewpoint of both the short and long-term cycles as a means of identifying what might become the catalyst in triggering the demise of global economic growth.

◆First we look at the short-term factors. The global economy began slowing down in 2018 due to the falling away of special factors which helped to accelerate the economy in 2017, and there is no need for overly much pessimism regarding this point. There is a very good possibility that the slowdown will continue in 2019. However, the disappearance of special factors and inventory adjustment are not strong enough factors to cause a global recession. In fact, there is a good possibility that before long in 2019 the factors causing the economic slowdown will fade away and the global economy will bottom out.

◆However, the long-term structural argument throws cold water on the optimistic outlook. Frankly speaking, the major factors of concern are the capital stock cycle, which has a significant influence on the global economy over the long-term, and the credit cycle, which works in the same way. The global economy’s capital stock cycle is now entering a maturation phase. Hence adjustment could start at any time, and if it does, this could become the catalyst triggering the demise of global economic growth.

◆It is difficult to predict exactly what might become the catalyst triggering a recession. However, as far as we can see, there is not much room for doubt that the FRB’s monetary policy is first on the list of risk factors. We are now nearing the point of a reversal in short and long-term interest rates, which is a sign of approaching recession. The hasty raising of interest rates has been a cause of recessions in the past. The FRB has been reducing its asset holdings as a means of keeping the leveraging of debt by US corporations under control. The level of debt leveraging in the US now exceeds the level of past bubble periods. The FRB’s policy is likely to continue unchanged. The risk that the credit cycle could experience a reversal due to the increasing cost of issuing corporate bonds is beginning to look like it could become a reality.

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