BIT BY BIT, THE WORLD´S ECONOMIC RESILIENCE IS BEING WORN AWAY / THE ECONOMIST

Teflon capitalism, tested

Bit by bit, the world economy’s resilience is being worn away

Growth has held up astonishingly, given geopolitics. But it can’t last for ever

Illustration: The Economist /Getty Images

As Donald Trump prosecutes his trade war and muses about sacking Jerome Powell, the chairman of the Federal Reserve, analysts are poring over the data—and they are seizing on the smallest dips in stockmarkets and rises in inflation as proof of harm. 

Take a step back, though, and what is striking is how calm it all is. 

Over the past decade the global order has been upended by populists, authoritarians and war. 

Yet, as we explain this week, the economy is powering on, unfazed. 

Aside from a brief contraction as covid-19 lockdowns went into effect, global gdp has grown at a respectable annual clip of about 3% since 2011. 

Across the rich world, unemployment is near a record low. 

Both America’s S&P 500 and the global MSCI index of stocks are near record highs.

This resilience, a Teflon-like superpower, is cause for celebration. 

It means that the twin scourges of recession and unemployment have been kept at bay. 

The trouble is that threats are now mounting. 

Because governments do not appreciate the economy’s resilience, they are undermining the fundamental sources of its strength.

To see the danger, consider first what has propelled the long expansion. 

Around the world, economic policy now cushions demand more effectively. 

After the long agony of the global financial crisis, rich-country governments decided that decisive fiscal stimulus was the best way to avert economic pain, and low interest rates made their interventions affordable.

Meanwhile, policy in the emerging world improved. 

The number of inflation-targeting central banks rose to 34 in 2022, from five in 2000. 

More governments let their exchange rates float and issued debt in local currency, sheltering them from the vagaries of American interest rates. 

That helped stave off debt crises even as rates rose and commodity-price spikes made life harder for importers.

More stable demand has been met by increasingly flexible supply. 

During the pandemic, early shortages of masks and chips convinced politicians that markets could not be trusted. 

In fact, supply chains responded quickly: hand sanitiser was churned out by the gallon; shipments of chips spiked in 2021. 

More recently, a glut of oil—thanks in part to America’s shale drillers—meant that even as Israel and then America bombed Iran, the price of crude barely budged.

You should be worried, therefore, that the fundamentals of Teflon capitalism are now looking shaky. 

The costs of activist policies are mounting. 

Politicians in the rich world spent more than 10% of GDP shoring up demand during the pandemic; those in Europe allocated, on average, another 3% during the energy crisis. 

Interest rates on ten-year government debt now average 3.7%, up from 1% during the pandemic.

Yet because voters increasingly expect the state to step in, and fiscal consolidation is hard, debts are ratcheting up. 

Even as the economy hummed along last year, America ran a deficit of 7% of GDP. 

Britain’s attempt to cut benefits for the disabled ended in tears; French pension reforms seem just as doomed. 

With every increase in the fiscal burden today, governments’ ability to step in next time trouble hits is sorely constrained.

Moreover, the instinct to protect now extends to supply chains. 

Prices play a crucial role in a market economy, sending signals about what is scarce and what is plentiful. 

But governments are seeking to override them in the name of sparing voters’ wallets and jobs. 

According to the imf, the rich world had 1,000 industrial-policy measures in place in 2022, up from 100 in 2017. 

While Mr Trump uses tariffs, the European Commission is relying on subsidies and strictures; it is reportedly mulling a plan for its school-meal scheme to buy food locally.

All this will only make supply chains more brittle. 

The pandemic revealed that diversified supply was more resilient than local production, which could be taken out by a lockdown or natural disaster. 

And governments are hardly the best backers of new supply. 

The biggest triumph of American reshoring, the rise of the shale industry, came about not because of policy, but because entrepreneurs spied an opportunity.

History shows that economies do not stay stable for ever. 

The longer an expansion, the more politicians, investors and companies take risks, hastening its demise. 

On July 16th Mr Trump said that he was “highly unlikely” to sack Mr Powell. 

If he were to change his mind, undermining the central bank’s independence, the placidity of the past decade would be put to the test. 

The economy has surprised so far; it could surprise for a while still. 

But the Teflon is wearing thin.