US recession indicators are growing stronger and there's one bigger-than-usual reason why the world should be worried: China isn't coming to the rescue this time.
In the past week alone, a gauge of US manufacturing unexpectedly fell to its weakest reading in a decade and payrolls at private companies grew less than forecast. Economists are starting to wonder whether the US has approached so-called stall speed, the slowest pace of growth without careening into a recession. The International Monetary Fund, meanwhile, will likely downgrade global growth estimates this month.
One of the engines that drove a global economic recovery after the last two downdrafts in America – the relatively shallow one in 2001 and the catastrophe that began in 2007 – was China. As the financial crisis escalated, Beijing opened a floodgate of credit and cut interest rates, which stoked demand for everything from Australian coal to German cars.
We're unlikely to see anything like that this time. Beijing has shown little appetite for another round of massive fiscal stimulus as it atones for the profligacy of the last decade, which left a massive buildup of debt and fueled asset bubbles.
While Chinese authorities have been juicing the economy the past year, they have been very careful about how they go about it. Economists keep predicting cuts in the benchmark interest rate; but those haven't been forthcoming, as my colleague Shuli Ren wrote recently. The People's Bank of China (PBOC) has preferred trims to lenders' reserve requirements, as officials focus on the best way to channel credit to certain sectors of the business world. Open-slather easing, it isn't.
That doesn't augur particularly well for the prospects of a global recovery. The financial crisis saw the world's most consequential central banks coordinate rate cuts, with China's participation. Beijing's involvement made China a serious player in the global monetary order.
How likely is it that the PBOC will happily sign off on something with the Fed once again? With President Donald Trump sitting in the White House, not very. Then again, Trump has already likened Federal Reserve Chairman Jerome Powell to Chinese President Xi Jinping. Desperation has been known to make odd bedfellows in pursuit of shared short-term goals.
The good news is that any steps China does take will have ripple effects given its sheer size. Gross domestic product is now about $14 trillion, compared with barely more than $1 trillion in 2001 and about $4 trillion in 2007. Chinese firms continue to plow investment into neighboring countries and Beijing-funded lenders like the Asian Infrastructure Investment Bank may well step up to provide cash to struggling economies.
Let's keep things in perspective, though. China is now recording quarterly economic growth of about 6%, not the 15% notched in 2007 or the roughly 10% in 2001. The executives and politicians who tripped over themselves to praise China’s model of development are noticeably quieter now.
Not every recession is like 2007, nor are they always accompanied by a financial collapse. The next slump, whenever it comes, will still be painful, so the US might want to start casting about for an enthusiastic partner. It’s probably a mistake to expect that’ll be China this time around – it’s not only less willing, but less able.