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Guy Wagner, Managing Director of BLI - Banque de Luxembourg Investments, points out that in the context of the US-China trade war, businesses are cautious about investing, and this has been more detrimental to Europe and the eurozone than the United States.

In 2019, the global economy grew at its slowest pace for ten years. Should we fear an eventual downturn and recession?

For now, fears of a recession are exaggerated. But over the last ten years, growth has become structurally weaker. So, whenever there is a slowdown, fears of recession follow all the more quickly. But again, these are exaggerated.

What are the main reasons for this slower pace of growth?

As regards purely structural aspects, the causes are linked to traditional factors that come under the definition of growth: demographic trends, questions of productivity, etc. Today, these all constitute real brakes on growth. On top of this, we have the problem of massive excessive debt, with numerous empirical studies showing the very close correlation between excessive debt and weak growth.

Meanwhile, the stark context of trade tensions between the US and China looms large over the climate of confidence and depresses investments. Within this structural framework of weaker growth, deceleration tends to escalate.

The impact of the Fed’s decisions on global growth is relatively limitedGuy Wagner, Managing Director, BLI – Banque de Luxembourg Investments

What reactions can be expected following the Federal Reserve's recent decision to pause its interest rate hikes after three successive announcements of interest rate cuts?

The Fed’s U-turn provided an immediate boost to the financial markets but, at a macroeconomic level, the impact on growth has been relatively limited.

Will the trade war that has been simmering for a long time between China and the United States weaken the US economy?

So far, the impact of these tensions on the American economy has been limited as US growth remains robust. Its main engine is private consumption, in contrast to the eurozone which is much more exposed to the fluctuations in global trade that are directly impacted by the current trade spat.

Nobody takes the US budgetary deficit seriouslyGuy Wagner, Managing Director, BLI – Banque de Luxembourg Investments

At the same time, the United States is facing an unprecedented budgetary deficit which inevitably restricts the authorities’ options for stimulating economic activity. Have we reached an impasse?

It’s not necessarily an impasse but it is worrying. The problem is that, nowadays, nobody takes it seriously. Here and there, including in Europe, voices are raised about interest rates, and hence the cost of government financing, being so low that this issue of budget deficits gets somewhat overlooked.

What is surprising is that this record deficit comes at a time when the US economy is doing relatively well. It is in the middle of its longest-ever growth cycle, which ought to generate a budget surplus. Generally, budget deficits tend to be seen at times of recession. Yet, here we are, after more than 10 years of growth, with a historically low unemployment rate, and, in spite of everything, a record budgetary deficit.

Is the eurozone robust enough to cope with a deteriorating international economic climate?

Today's economies are increasingly dependent on services rather than industry. Fortunately, services are relatively stable: in the past, when economies were more dependent on industry (by definition more cyclical), growth proved more volatile. Today, growth may be more moderate but it is relatively stable.

Clearly, the US-China trade war is having a greater impact on Europe and the eurozone by affecting business confidence (companies reluctant to invest) and hence global trade. But, as I said, the European economy is more open than America's, which is why it is more impacted.

Where the eurozone is concerned, we should not underestimate the risk of recession: it is a region with lower growth potential and is more impacted by what is happening around it.

 

Guy Wagner
Managing Director of BLI – Banque de Luxembourg Investments
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