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Feb 04 2016

Major Advanced Economies Slowing in Concert

Amid rising fears of a global recession, the world’s largest rich economies are already mired in growth rate cycle (GRC) downturns. Specifically, the growth rates of ECRI’s coincident indexes have already dropped to a 27-month low in the U.S., a 15-month low in Germany, a five-month low in France, and an eight-month low in Japan, while staying at a 21-month low in the U.K. Whereas the U.S. and U.K. have been in GRC downturns for the past year, Germany, France and Japan have started to slow only in recent months.

The difference is that, until recently, the magnitude of economic growth in the U.S. and the U.K. — in contrast to Germany, France and Japan — has been moderately robust, even though, in terms of cyclical direction, economic growth actually turned down a few months earlier in those two English-speaking economies, unbeknownst to most. This may account for the different direction of monetary policy stances in the Eurozone and Japan, on the one hand, and the U.S. and U.K., on the other. That divergence has lessened a bit as the slowdowns have become more apparent in the U.S. and the U.K., where interest rates are more likely to remain near the zero lower bound.

This was not the intent of all those years of quantitative easing (QE) and zero interest rate policy (ZIRP). As we noted last fall, “A key Fed goal has been to demonstrate that, given sufficiently aggressive and timely QE, the U.S. would not ‘become Japan,’ returning repeatedly to ZIRP and QE.” (ICO Essentials, October 2015). The prospect of such a disappointing result now looms larger.

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