- More policy accommodation in the form of easier credit and fiscal stimulus from Beijing looks likely
- The Federal Reserve must go the extra mile and consider another interest rate cut while Trump must resolve the trade war with China
It's a popular notion that night is darkest just before the dawn, the belief that things appear at their worst just before they start getting better. China's economy may be suffering short-term challenges due to the coronavirus outbreak, but the economy will eventually spring back once the crisis is over.
In the meantime, a strengthening US economy can help pick up the slack for global growth until China gets back to normal. Mutual help can go a long way and an end to trade war hostilities between Washington and Beijing would be a great place to start. Everyone needs to do their bit.
Nobody really knows at this stage how the crisis will pan out and what damage the coronavirus is doing to the global economy. But with some of the more pessimistic projections suggesting that up to 1 to 2 percentage points might be knocked off China's growth rate in the first quarter, it's not good news for an economy where growth has been losing momentum in recent years.
Beijing is working hard to fight the outbreak and more policy accommodation can be expected. Easier credit, more fiscal stimulus and a weaker renminbi exchange rate look likely, but other countries must chip in too.
China and the US both have a common interest in promoting faster global growth. There's no room for complacency and just hoping that recovery fires up spontaneously is not enough.
Over the coming months, shoring up confidence is vital and it's important that the US Federal Reserve and President Donald Trump both keep sending upbeat messages to American consumers and business.
The US seems to be kicking off 2020 on a reasonably solid footing but is still capable of doing a lot better. The economy grew by 2.3 per cent last year, after 2.1 per cent expansion in the fourth quarter, but it's the slowest annual growth rate since 2016. The US unemployment rate may be at a 50-year low, but the economy is still nowhere near reaching full potential.
The Fed has to go the extra mile, keeping credit policy as loose as possible for as long as it can. Certainly, another US interest rate cut should not be ruled out. The Fed's current "wait-and-see" approach is not enough and should be more proactive given the possible downside risks to growth right now.
There's little chance of the economy overheating as inflation is not the main danger here " the worry is that growth continues to underperform and inflation keeps undershooting its 2 per cent target.
There have been times in the past when the Fed has gambled with unduly dovish interest rates to reboot better growth, flouting far bigger upside inflation risks in the process. Right now, benign inflation is Fed chairman Jerome Powell's free pass to take a chance with new easing.
Trump has been remorseless about browbeating Powell into submission on lower interest rates, but needs to bury the hatchet and start working with the Fed as a team. Trump needs as many allies as he can muster as the US elections approach in November.
He needs to win over farmers and blue-collar workers in the dust and rust belts, but, more importantly, he needs to get middle America back on his side. It means settling the trade rift with China, hinting at new tax cut incentives and rebuilding confidence for US consumers and business. He has his work cut out.
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Time is running out and the race is on to get the US economy rolling again. If Trump and the Fed can work in harmony, there's no reason US growth can't be levered back up towards 3 per cent by the end of the year. Monetary and fiscal policy working in unison can go a long way.
If the US and China can settle their differences over trade, there's every reason to believe that global growth can surprise on the upside in 2020.
David Brown is chief executive of New View Economics
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