Take the news that Japanese gross domestic product only fell 2.2% in the first quarter, not the initially reported 3.4% contraction. Or Friday’s bombshell announcement that the U.S. unemployment rate ended May at a lower-than-forecast 13.3%.
There’s good reason to be skeptical about such data, and not just because the U.S. Labor Department flagged a “misclassification error” that muddies the picture (the real jobless rate may be 16.4%). Make that more than 9 trillion reasons.
That’s how much, in U.S. dollar terms, fiscal policymakers have pumped into the global economy as Covid-19 fallout intensifies. In detailing this tally, the Institute of International Finance points out that direct budget expenditures make up $4.4 trillion of that total. The other roughly $5 trillion comprises off-budget schemes including loan guarantee programs and support for equities.
But two things are worth keeping in mind. One is that the net borrowing needs of the four biggest economic powers—the U.S., the euro zone, Japan and the U.K.—are already triple 2019 levels. The balance sheets of the Group of Four central banks, meantime, will soon exceed an unthinkable $22 trillion. Two, these unprecedented responses might not be enough.
Recent data out of China show why. Though economists have long since dropped delusions of a “V-shaped” recovery, there’s ample chatter about a “U-shaped” revival. News, however, that Chinese exports fell 3.3% in May from a year ago suggests otherwise. Especially, when you put it together with a 16.7% tumble in imports.
The gloom, in other words, is coming from both inside and outside. Yet even in weakness, Chinese trends risk drawing Donald Trump’s ire in Washington. In May, Beijing posted a record $62.93 billion trade surplus, the biggest since economists began tracking the series in the early 1980s.
China’s surplus with President Trump’s America jumped to nearly $28 billion. Trump supporters have every reason to wonder what that “phase one” trade-deal drama was all about. At the same time, White House advisors like uber hawk Peter Navarro have surely noticed that China’s currency is trending lower.
The yuan’s 3.4% drop since mid-January is perfectly defensible in economic terms. With China’s highly indebted, unbalanced economy growing the slowest in 30 years, some currency weakness is to be expected. Yet Navarro is almost surely working behind the scenes to convince Trump that Chinese President Xi Jinping is thumbing his nose at America.
The trade war Trump launched in 2018 is about to kick into a higher gear. His reelection bid is floundering as a botched Covid-19 response slams the economy. A tone-deaf response to giant Black Lives Matter protests all around the U.S. is savaging Trump’s poll numbers versus Democratic rival Joe Biden.
Any attempt to regain momentum is sure to run through Beijing. Trump’s blame-China coronavirus narrative will take economic dimensions. That means tariffs on Chinese goods or Trump expanding the list of mainland companies that are banned from doing business as usual in the U.S. It could mean more barriers for China-region companies looking to list on U.S. exchanges.
Trump might make good on threats to slap 25% taxes on cars and auto parts, devastating Asian supply chains. He could go further to disrupt Xi’s “Made in China 2025” scheme. Taxing Beijing’s designs on dominating the future of artificial intelligence, micro-processing, renewable energy, robotics, self-driving vehicles and other areas could crimp growth around the globe.
Any move by Trump to weaken the dollar would shake up global markets already on edge. Count the ways, too, Trump might try to troll Beijing—sending more naval ships to the South China Sea, offering asylum to Hongkongers, a phone call to Taiwan President Tsai Ing-wen.
China, too, has myriad ways to retaliate: tariffs on U.S. goods, dumping $1.1 trillion of U.S. Treasuries, tit-for-tat bans on U.S. companies, a sharp yuan devaluation.
All this might seem less troublesome if there were economic engines on which to rely. Europe is facing the worst recession since the 1930s. What’s more, European Central Bank President Christine Lagarde faces the specter of outright deflation. Drops in prices and wages could easily get out of control.
Japan isn’t exactly booming. It ended 2019 contracting 7.3% between October and December and the pain is only just beginning. Already, Prime Minister Shinzo Abe rolled out $2 trillion of fiscal pump-priming, roughly 40% of GDP. Yet without vibrant export markets, it’s hard to see how fiscal pump-priming produces a solid, self-reinforcing recovery.
Just as with Covid-19, the G4 economies could be in store for a second wave of turmoil from the developing world. Brazil’s economy, for example, may be teetering on the edge of default, spelling trouble to come for emerging economies.
Brazil, the ninth-biggest economy, is the “B” in BRICS, along with Russia, India, China and South Africa. Back in 2013, amid the “taper tantrum,” it also was on Morgan Stanley’s “fragile five” list with India, Indonesia, South Africa and Turkey. It wouldn’t take much for volatility in Brazil to morph into a full-blown contagion in the coronavirus era.
So, we have a growth-destroying pandemic, deflationary risks and a crop of world leaders desperate to hold onto power. Put it all together and the $9 trillion-plus of public stimulus we’ve seen to date is little more than a down payment of spending to come.