Uh, oh. That’s what I find myself muttering these days when I fire up the news browser or open my morning papers. The economic news leaves me with a sense of dread. I find three developments especially worrisome:
1. Europe’s slow-motion economic crisis, now more than three years old, rumbles on. The odds of a dramatic conclusion that could wreak havoc on the world economy rise every day.
This is a crisis of confidence — in banks, in sovereigns, and, indeed, in the very idea that sovereigns with widely disparate growth rates can function with a single currency. Greece, with high levels of public debt, a very large public sector, little production of exportable goods with which to balance imports, early retirement and nonchalance about paying taxes, already has effectively defaulted. In anticipation of a “Grexit” — an exit of Green from the 17-nation currency union — Greeks are taking their money out of Greek banks. Bank runs aren’t supposed to happen in modern economies.
The most obvious signs of financial stress in Europe are today’s extraordinarily low interest rates on government paper issued by the U.S., Germany and Japan. They have become the safe havens for investors terrified by the fragility of the European Union (27 members) and the eurozone (17).
Interest rates on German two-year bonds (“bunds”) have effectively reached zero. Speculators are scooping them up on thetheory they will make a killing if and when Germany goes back to the Deutschmark. Spreads between Spanish and German interest rates are at the highest of the Euro era.
The headlines out of Europe these days remind me of the Wall Street-Washington headlines in the fall of 2008 when Lehman, Washington Mutual and AIG went down. Contagion within Europe and beyond is an obvious threat to the global economy. It is not what we want at a time when most advanced economies have yet to fully recover from the Great Recession.
2. China’s growth rate is slowing. The globe’s second-largest economy is delaying deliveries or refusing to pay for shiploads of bulk commodities. Slower growth is not surprising given that the U.S. and Europe, both saddled with slow growth or near-recession conditions, are major customers.
But the slowdown comes at an inconvenient time for China, on the eve of a once-in-a-decade leadership hand-off that is complicated by palace intrigue in a one-party state.
3. The Wall Street Journal reported Friday that Airbus has shelved plans for increasing production of the A320, the jet that competes with the work-horse Boeing 737. This is the first indication from a major player that the aircraft-order boom that has pushed Boeing’s backlog to eight years of production is coming to an end. I regard it is a warning sign for the local-regional economy, a huge beneficiary of a run-up in aerospace employment.
The Seattle area, buoyed by rising employment in aerospace and technology (software, e.g.), has been an economic bright spot in Washington and the Pacific Northwest for the past couple of years. But based on what is happening in the rest of the world these days, I can’t shake off the feeling that the ice is getting thin.
I e-mailed my laundry list of concerns to a professional acquaintance last week, asking, rhetorically, “What’s to like?” He replied: “I like the enthusiasm and smartness of young people.” No quibble from me there. I am as optimistic as the anyone about the long-term prospects of the U.S. economy, virtually the only advanced economy with a birth rate above the replacement rate. If demography is destiny, the U.S. is in good shape long term.
But I worry that we have a bed of fire to cross before we reach the promised land of peace and prosperity.