Sharpened trade tensions increase the risk that a slowdown in manufacturing will spread into other sectors "sooner rather than later," according to Laurence Boone, chief economist at the Organisation for Economic Co-operation and Development.
Laurence Boone, chief economist at the OECD |
Some people "take comfort in the fact that the service sector is doing well" and labor markets remain strong, but those are "lagging indicators," Boone told S&P Global Market Intelligence. The manufacturing sector cannot experience a sharp slowdown without leading to some spillover to the service sector and prompting layoffs, she said.
"The question is when, and we are extremely concerned that with the escalation ... the 'when' will be sooner rather than later," she said in an interview on the sidelines of the Federal Reserve Bank of Kansas City's annual conference in Jackson Hole, Wyo.
Boone spoke a day after the trade war between the U.S. and China intensified, with China announcing 5% to 10% tariffs on roughly $75 billion worth of U.S. imports and President Donald Trump retaliating by upping levies on Chinese goods. Tensions are also evident between the U.S. and France, which is pushing through with a 3% tax hitting major U.S. tech companies. Trump has threatened tariffs on French wine over the issue.
Trade uncertainty has "hurt growth massively," Boone said. In May, the Organisation for Economic Co-operation and Development, or OECD, trimmed its estimate for global growth in 2019 to 3.2%, down from its May 2018 estimate that the world economy would grow by 3.9% this year.

The trade disputes may have a lasting impact even if they are resolved favorably, as it "will take time to rebuild trust" in the international trading system, she said.

In recent weeks, central banks have begun cutting interest rates to help cushion their economies against weaker growth. But key central bankers at the Fed's Jackson Hole conference expressed worries about the limited ability of monetary policy to counteract the trade war's drag on their economies.
Federal Reserve Chair Jerome Powell said on Aug. 23 that monetary policy can support consumer spending and business investment, but it "cannot provide a settled rulebook for international trade." Philip Lowe, who heads the Reserve Bank of Australia, said monetary policy is "carrying too much of a burden" and called on political leaders to provide fiscal stimulus by increasing infrastructure investments, Bloomberg News reported Aug. 24.
Boone echoed that message, saying central banks "cannot do everything" and that monetary policy is already "stretched."
Governments should take advantage of today's lower interest rates to provide fiscal stimulus if they can afford it, she said. Fiscal policy can target investments to groups of people or sectors in a "much more granular and specific way" than monetary policy, a blunt tool that affects the price of credit broadly across a jurisdiction, Boone said.
Boone, who was a key adviser to former French President François Hollande, said fiscal stimulus may be particularly effective in Europe. That is because the continent's closely linked economies mean a fiscal jolt in one country has a bigger chance of spilling over into others, she said.
One potential limiting factor of such efforts is the European Union's rules stating that member countries are not supposed to have deficit levels above 3% of GDP.
The rule is a responsible check on excess spending since "we must be careful" not to burden future generations with significant public debt, Boone said. But those rules should not prevent policymakers from thinking about whether they are using fiscal policy effectively in their own countries — and more importantly, whether the EU's fiscal stance is appropriate, she said.
"I think what really needs to be changed is to think [about the euro area] as a whole, not focus on individual countries, because then we don't have the optimal stance for the eurozone," she said.

