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What’s Driving the Global Slowdown?

Faced with an increasingly synchronized global slowdown, policymakers must use a judicious mix of monetary and fiscal measures and recommit to broader reforms of product, labor, and financial markets. How well they respond to these challenges will shape the course of the world economy for years to come.

ITHACA – The drumbeat of warnings about a looming worldwide recession is growing ever louder. According to the latest Brookings-Financial Times TIGER indexes, which track the global economic recovery, growth momentum is declining in virtually all of the world’s major economies. And what this portends in the longer term is ominous, especially given the limited macroeconomic policy options for stimulating growth. 

The current slowdown is mainly the result of weak business and consumer sentiment, geopolitical uncertainties, and trade tensions. These factors have dampened corporate investment and could hurt future growth prospects, too. If the downturn persists, current high levels of public debt and low interest rates will limit the ability of policymakers in large advanced economies to provide significant fiscal or monetary stimulus. Other, less conventional monetary-policy measures, meanwhile, would come with significant risks and uncertain payoffs.

In the United States, economic expansion has moderated as the effects of fiscal stimulus fade and employment and retail sales weaken. Forward-looking business- and consumer-confidence indicators, and a yield curve that remains relatively flat despite the likelihood of larger budget deficits, suggest further problems ahead. With wage and inflationary pressures still muted, the Federal Reserve has put its rate-tightening plans on hold. The talk now is of possible rate cuts, and a halt to the unwinding of the Fed’s balance sheet.

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