As Global Economy Sputters, U.S. Growth Is Jeopardized
Business + Economy

As Global Economy Sputters, U.S. Growth Is Jeopardized

  • Europe has hit ‘another rough patch’
  • Germany, Europe’s biggest economy, saw contraction last spring
  • Japan’s economy is also flat-lining, while China’s is slowing

While the U.S. has benefitted from steady job growth and a drop in its unemployment rate to pre-recession levels, the same cannot be said for most of the rest of the world, according to a new Brookings Institution report.  

Much of Europe has hit “another rough patch,” the study on the global economic recovery said, with the three largest economies – Germany, France and Italy – showing no signs of growth. Germany, whose economy powered the Eurozone’s tepid recovery, actually saw its economy contract last spring.

Related: U.S. Economy, Stocks Can’t Escape the World’s Pain

Japan’s economy is also contracting, dragged down by tax increases associated with a deficit reduction plan, according to Brookings. China’s “growth momentum has slowed” as it undergoes financial sector and other market-oriented reforms, the researchers found.

Moreover, the Brazilian and Russian economies are flat-lining, with the implication that their overall market growth is almost certain to remain weak for the rest of the year, according to the analysis.

“The world economy is now being powered mostly by the U.S. growth engine, a situation that is untenable for a sustained and durable global economic recovery,” wrote Eswar Prasad, Karim Foda and Arnav Sahu in the Brookings study.  

Treasury Secretary Jack Lew echoed many of the study’s themes in a speech Tuesday morning at the Peterson Institute for International Economics in Washington.

Related: How Europe’s Economic Slump Could Doom Ukraine

Noting that Labor Department figures last Friday showed that employers added 248,000 jobs in September and that the unemployment rate had dropped to 5.9 percent – the lowest since July 2008 – Lew said, “We’ve seen continuing signs of a strengthening U.S. economy. The whole world is looking at the U.S. economy to continue being a strong engine for growth.”

“While we’re determined to have the U.S. economy grow strongly, the rest of the world also has to take steps to make sure that growth continues to accelerate,” Lew said. “We’ve seen in other countries that there has been a less determined response to their own economic conditions…. There is a need to focus on growing short-term demand while at the same time focusing on long-term structural reforms for long-term growth.”

Lew added, “I do think there is a need for more action in quite a number of parts of the world. I don’t think the United States alone can pull the global economy to where it needs to be.”

There are a myriad of explanations for the current state of world economic affairs in which the U.S. and the United Kingdom are among the few positive standouts. The Brookings authors include “geopolitical uncertainties” that have undermined business and consumer confidence. In addition, there are concerns that major economies continue to rely on monetary policy and manipulation of the money supply “to do the heavy lifting” instead of undertaking critical structural reforms.

Related: Ruble’s Nosedive Shows Power of Russian Sanctions

“To support more balanced growth, other economies will have to start pulling their weight, ideally by generating more domestic demand rather than relying on exports,” the report stated. “A revival of growth cannot be engineered just by relying on central banks, a lesson that still seems beyond the grasp of political leaders.” 

The report, titled “A Shaky Recovery Runs out of Steam,” was based on research and analysis from the October 2014 update of the Tracking Indexes for the Global Economic Recovery (TIGER) interactive map, done in collaboration with the Financial Times.

In touting the long-term economic successes of the Obama administration and the Federal Reserve, Lew said, “We took definitive steps, starting in 2008, to staunch the financial crisis, including a major stimulus. We took more steps than most of the world did. We took very decisive steps to get demand going again in this economy and we’re now reaping the benefits of that.”

Related: Why Jack Lew Is Kidding Himself About Too Big to Fail  

However, as the Brookings study noted, the U.S. recovery is far from complete and many problems persist. For instance, the labor force participation rate remains three percentage points lower than before the crisis and part-time employment remains high. “Despite strengthening domestic demand, labor market slack has kept wage and inflationary pressures under wraps,” the report said.

Rob Garver of The Fiscal Times contributed to this report.

Top Reads from The Fiscal Times: