War and Tariffs Are a Double Shock to the World Economy

By Stephen S. Roach – Project Syndicate

NEW HAVEN – The outbreak of a new war in the Middle East, together with a destructive tariff war, makes for a lethal combination in a sluggish world economy. Notwithstanding the possibility of a tentative ceasefire, the odds of imminent global recession have increased sharply.

One shock was bad enough. US President Donald Trump’s tariffs, wherever they eventually settle, imply downside risks to global growth. But the potential for a second shock – a war between Israel and Iran that has now ensnared the United States – compounds the problems for an increasingly vulnerable world economy. It fits with my theory of cyclical risk: it doesn’t take much to tip an economy nearing “stall speed” into outright recession.

This simple rule has worked remarkably well in predicting global recessions over the past 45 years. Unlike a recession in an individual economy, which generally reflects a contraction of real output, one at the global level typically involves about half the world’s economies contracting while the remainder continue to expand. As a result, a worldwide recession is usually associated with global GDP growth slowing to the still positive 2-2.5% range – a shortfall of 0.8 to 1.3 percentage points from the post-1980 trend of 3.3%. The exceptions were in 2009 and 2020, when the global financial crisis and the pandemic, respectively, caused outright contractions in global output.

The stall speed holds the key to cyclical risk assessment.