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How Vulnerable Is the Global Economy?

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JEFF KLEINTOP: How vulnerable is the global economy to trade conflict?  You know, in some ways, the global economy is less vulnerable than it’s been in recent years because all of the world’s major economies are growing right now. And that’s been relatively rare in the last six years. For example, among the G7 countries—which include the U.S., the U.K., Canada, Japan, France, Italy and Germany—in 2015, Canada was in recession; in 2014, Japan and France were in recession; 2013, it was Italy; 2012, it was Japan. So it’s been a while since we’ve had all these economies growing. That’s a positive. 

But we can take a look at how vulnerable each of these economies are to a peak in their economic cycles ahead of any major trade conflict that might increase those vulnerabilities. And the way we can do that is to look at the difference between the unemployment rate and the inflation rate for each of these countries. And, usually, at the beginning of an economic cycle, the unemployment is pretty high, a lot of people have lost jobs. And the inflation rate is pretty low, companies are cutting prices to gain customers. But as the economy matures, the gap between the unemployment rate and the inflation rate narrows—more people find jobs, companies are able to raise prices—until there’s no gap between them, they’re the same number.  And at that point, it’s been a signal over the last 30 years for these G7 economies that their economies are overheating, when the unemployment rate and the inflation are the same number, and they’re very near the next recession, and vulnerable to things like trade risks.

Fortunately, that’s not where we are yet. Major G7 economies, like the U.S., the U.K., Japan, still have a 1 to 2% gap between their unemployment rate and their inflation rate. That gap has been closing, but it’s still wide. And it’s true for the G7, as well. We’re still at least a year or so away from the levels at which we’ve seen an overheated economy and risk to recession in the past. 

So that’s a positive, but the gap is closing.  And that does suggest increasing vulnerability to trade risks, especially if these risks continue to escalate.

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