Confronted with disappointing data from around the world, economists are whispering a word that hasn’t seemed like a real possibility for a while: recession.
It starts with the slowdown in China, which is already straining the global recovery. The world’s second-largest economy has lost its appetite for the raw materials that fueled its industrial boom, leaving the smaller countries that supplied it with resources stumbling in its wake. Slower growth abroad translates into weaker foreign currencies and a stronger U.S. dollar, which makes American goods harder to sell in the global marketplace.
A growing chorus of prominent economists and analysts are arguing those dynamics could tip the world – and the United States along with it – into recession within the next two years. The fear is showing up in the recent wild swings in financial markets, rare outside of broader economic downturns. The pace of U.S. job growth has slowed substantially compared to last year. And though the economic expansion has never quite reached many workers, it has actually lasted longer than the postwar average.
“The global economy is uncomfortably close to the edge,” said David Stockton, senior fellow at the Peterson Institute for International Economics.
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In addition, the final months of the year are a potential minefield for the U.S. recovery: Congress must raise the nation’s borrowing limit before Nov. 3 to avert a catastrophic default. Lawmakers also need to approve the budget for the federal government or face a confidence-sapping shutdown. A wrong move by the Fed as it weighs whether to raise interest rates this year could stymie the economy’s momentum.
Most analysts still believe the most likely scenario is that the country continues to chug along: Congress reaches an eleventh-hour compromise, the nation’s central bank maintains its balancing act, and the U.S. recovery is weighed down but not derailed by international turmoil. Currently, estimates of economic growth are around a sluggish 1 percent annual rate, and though expectations for next year have been repeatedly lowered, they are still positive.
But economists say that those forecasts, which are by nature uncertain, are particularly murky now. China this week reported its economy grew at a 6.9 percent annual rate over the past three months. That’s far faster than U.S. performance, but still the slowest pace since 2009 and shy of the government’s target of 7 percent.
Many analysts believe the official Chinese numbers are too rosy. In the country’s crowded cities, high-rise apartment buildings sit vacant and factories lay idle after saturating the global marketplace with cheap goods. Outside economists believe the country’s growth rate may be as low as 3 percent, and that uncertainty makes forecasting the ripple effects even more precarious.
China accounts for only a tiny sliver of U.S. exports, but its influence is far wider. The slowdown in China is pushing down oil prices just as America’s production was peaking.
Meanwhile, countries such as Brazil and Australia that once boomed by exporting raw materials to China are now suffering a reversal of fortune as commodity prices plunge. As growth slows, their currencies are weakening against the dollar – which, in turn, makes U.S. exports more expensive and drags down on the recovery.
That complicated web means there’s plenty of room for a surprise – a bigger contraction in China, a sharper rise in the dollar, a more dramatic slowdown in hiring at home – that could reverse the progress the U.S. recovery has made.