Paul Krugman and Lawrence Summers are casting gloom on the global economy
Krugman, the Nobel Prize-winning economist, warned of market complacency as Donald Trump and Xi Jinping ratchet up a tit-for-tat trade war between the world’s two largest economies. Former U.S. Treasury Secretary Summers said developed nations are ill-equipped for another recession.
"I’ve been amazed at the complacency of markets as Trump marches off to trade war," Krugman wrote on Twitter. "We don’t know that he’ll go all the way, and break up the global economy. But surely there’s a substantial chance. 50 per cent? 30 per cent?"
The cautionary tone follows a lackluster first half of the year for global assets. US stocks climbed 2.8 per cent and emerging-market equities slid 3.9 per cent. A basket of global investment-grade bonds dipped 1.8 per cent amid concern global growth could wane as the US tightens monetary policy and European stimulus ends. Global stocks are trading around 15 times their estimated earnings, above the decade average, according to data compiled by Bloomberg.
Summers said the world’s most powerful monetary policymakers should be careful not to raise interest rates solely to curb inflation.
“Downturns happen,” he told Bloomberg TV on Tuesday. “When they happen, the normal playbook is to cut interest rates by 500 basis points, but there’s not going to be that kind of room."