Dr. Michael Ivanovitch
Artyom Ivanov | TASS | Getty Images
With the magnitude and scope of their trade and financial flows, those three large economic systems are fully capable of setting the pace of global business cycle dynamics – especially if they effectively coordinate their demand management policies.
Unfortunately, the policy coordination issue is an old pious wish, despite the fact that the G-20 had been set up precisely for that purpose.
So, as always, the U.S. will continue to be the pace-setter of the global economy at the cost of its half-a-trillion dollar trade deficits serving as net contributions to jobs and incomes in the rest of the world.
The U.S., however, is in no position to do that, but that is the price it has to pay for its failure to organize an appropriate burden sharing of running the world economy with its main trade partners.
Luckily, that’s what the Fed is looking at now.
The index measuring prices of consumption expenditures, excluding food and energy, has stabilized around an annual rate of 1.5%, comfortably below its 2% target range.
Unit labor costs, the key indicator of underlying inflation, are also stable. During the first nine months of 2019 they came in at an annual rate of 1.9%, roughly identical to readings observed over the previous two years.
The latest business surveys show the same picture of stabilizing or even weakening prices in recent months. And those surveys don’t indicate disruptions of global supply chains in the wake of widespread trade disputes.
Bond markets seem to agree by reflecting stable inflation expectations. The Fed, therefore, has the option to respond with further easing in case of weakening demand and employment creation.
Beijing’s trade balance turned negative last year, while its large tax cuts, reportedly amounting to 2% of GDP, contributed nearly 1 percentage point of economic growth.
Those tax cuts are part of fiscal reforms scheduled to continue this year, too. At the same time, China’s monetary authorities announced an appropriately easy credit stance to support aggregate demand, a transition to sustainable long-term growth and structural reforms of the financial sector.
Europe is a big disappointment. The euro area, the core component of the European Union, is failing to implement an expansionary monetary-fiscal policy mix that would prop up its sluggish economy and contribute to global demand and employment.
And yet, with the exception of Greece and Spain, most euro area members could, to a varying degree, ease their fiscal stance.
Germany, with its overflowing government coffers and the world’s largest trade surplus, should lead that process. But its governing coalition is in disarray and struggling with large public sector investment backlogs in transportation, education and healthcare.
Washington is looking at that with puzzling indifference to a quarter of its exports and a 10% increase in its trans-Atlantic trade deficit during the first eleven months of last year.
The progress being made with China on trade adjustment and economic reforms should serve as an example of similar changes in Washington’s relations with the European Community.
And apart from insisting on economic policy coordination with its main trade partners, the U.S. should also pay more attention to one-third of its economy consisting of export and import transactions with the rest of the world. That external sector has a direct bearing on growth and employment, public debt and the dollar’s exchange rate.
Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.
Correction: This article has been updated to reflect in the key points that the U.S. has half-a-trillion dollar trade deficits.