Global Economic Trouble Is Brewing, and the Trade War Is Only Part of It

In a span of less than 24 hours, developments in Washington and Wall Street have sent a vivid message: The world is ambling toward an economic morass of the sort that no mere presidential tweet can fix.

On Tuesday, President Trump blinked in the trade war with China, retreating from previous plans to apply tariffs to virtually all Chinese imports Sept. 1. The action ensures that American buyers of Chinese-made toys, smartphones and much more won’t face tariff-boosted prices this holiday season.

“Huzzah!” said the stock market. The trade war is de-escalating! Christmas is saved! The S&P 500 rose 1.5 percent, to a level only about 3 percent below its record high on July 29.

The bond market wasn’t quite so buoyant. While longer-term Treasury yields rose, reflecting more optimism, the increase was slight — and they remained far below their levels of late July.

On Wednesday morning, the signal sent by the bond market worsened further, as the yield on 10-year Treasury bonds plunged to about 1.60 percent as of 11 a.m. At some points, that rate fell even below the equivalent rate on two-year bonds.

That is called an inverted yield curve, and it is a sign that bond investors foresee weak growth and lower inflation in years ahead, and expect the Federal Reserve will respond by cutting interest rates. An inverted yield curve has often been a harbinger of recession, though not a guarantee of one.

That pessimistic signal from the bond market in turn prompted a sell-off in stocks Wednesday, reversing Tuesday’s gains.

This series of events does not bode well for the world economy. In this August of market turbulence, the shorthand explanation has been that it is a result of the trade war.

That is true as far as it goes, but the shift in the bond market since late July, and especially on Wednesday, signals something bigger is going on. The trade war is just one piece of it.

Sure, forestalling the latest China tariffs will help avoid a big hit to the profits of retailers and importers over the next few months — and it helps prevent American consumers from facing sticker shock during their holiday shopping.

But this is about something more consequential than a 10 percent tariff on iPhones. It’s really about the widening schism between the world’s two largest economies — one that cannot be reversed with a concession on tariffs by the president or with some soybean purchases by the Chinese. This clash is increasingly becoming part of the landscape that every global business must navigate.

The same could be said about the other geopolitical fires that risk flaring up. What will be the future of Hong Kong as China responds to pro-democracy protesters there? Will Britain leave the European Union on Oct. 31 as planned, and on what terms? Can India and Pakistan avoid a devastating armed conflict over Kashmir?

Oh, and the European economy may be heading toward recession; global central banks are largely at the end of the road in terms of what they can do to offset a new slump; and there is political dysfunction in many of the world’s biggest democracies that could limit their ability to respond to a new recession with fiscal policy or other tools.

If you’re a corporate C.E.O. making investment decisions, the environment in which you operate is shifting beneath your feet. Even with a seemingly bottomless supply of cheap capital available and a very low corporate tax rate, it feels awfully risky out there.

And indeed, through the first half of the year, falling business investment was a drag on American economic growth.

The latest developments don’t mean that a recession, or even a severe slowdown, is a certainty. The Federal Reserve, unlike its counterparts in other major economies, still has some room to cut interest rates to try to stimulate activity, and has shown it is willing to use that power. And American consumers have proved quite resilient this year even as business spending has stumbled; perhaps that will remain true.

But events this month signal that the problems facing the world economy are more complex and intractable than the immediate reaction to President Trump’s trade war de-escalation might suggest. A tactical retreat here and there won’t solve the deeper problems hanging over the world economy.

Once chaos has been unleashed into the global economic system, it can be hard to reel back in.

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