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How to Ward Off the Next Recession

A decade after the Great Recession, Europe’s economy is still convalescing, and another period of prolonged hardship would cause serious, potentially dangerous economic and political damage. With monetary and fiscal policy unlikely to provide enough stimulus, policymakers should explore alternative options.

WASHINGTON, DC – Despite confident official pronouncements, the deteriorating state of the global economy is high on the international policy agenda. The OECD recently revised down its forecast to 1.5% growth in the advanced G20 economies in 2020, compared to almost 2.5% in 2017. And its chief economist, Laurence Boone, warned of the risk of further deterioration – a coded way of indicating a growing threat of recession.

Structural shifts in the automobile industry, miserable productivity gains in advanced economies, shrinking spare capacity, and the build-up of financial fragilities would be sufficient causes for concern even in normal times. But, today, a combination of cracks in the global trading system and an unprecedented shortage of policy ammunition are adding to the worries.

As the OECD emphasized, a good part of the slowdown can be attributed to the ongoing Sino-American trade dispute. Chad Bown of the Peterson Institute reckons that, on the basis of announcements made, the average US tariff on imports from China will increase from 3% two years ago to 27% by the end of this year, while Chinese tariffs on US goods will rise from 8% to 25% over the same period. These are sharp enough increases to disrupt supply chains. Anxieties over a further escalation will inevitably dent investment.

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