COVER STORY • Japanese Economy After the Olympic & Paralympic Games Tokyo 2020 • 1

UInterview with Ryan Sweet, Economist at Moody’s Analytics

S Economy Slowing Down
in 2020, But Recession Is
Unlikely

By Japan SPOTLIGHT
In talking about the global economy in 2020, our central interest is how the US economy will fare. There
are some who argue that the US economy could fall into recession in 2020 due to the increasing negative
effects of the US-China trade war. Will this prove true?
Ryan Sweet, director of real-time economics at Moody’s Analytics, is among the most accurate highfrequency forecasters of the US economy, according to Market Watch and Bloomberg. Japan SPOTLIGHT
held the following interview with him.
(Interviewed on Nov. 7, 2019)

Self-Introduction

tax cuts, personal income tax cuts, andincreased government spending. This boosted
JS: Could you provide a selfthe economy temporarily which is traditionallyintroduction and tell us about yourwhat happens with periods of fiscal stimulus; itrole at Moody’s Analytics.
puts the economy on a bit of an adrenaline rush,which is fading in 2019 and that is why the
Sweet: I am director of real-time economics at
economy slowed back to 2% GDP growth for
Moody’s Analytics. I have been with Moody’s forthe entire year.
almost 15 years and am part of the US
Another reason the economy slowed is thatmacroeconomics team. My primary
the escalation of the trade war between the
responsibility is forecasting US economic data
United States and China did a lot more damage
and providing daily analysis on the economy
than people anticipated. The stock market was
and financial market conditions on ourvery sensitive to every tweet, and developments
Economic View platform. Economic View is theon the trade front. All the rhetoric coming fromvehicle for us to communicate our views on
both sides clearly affected manufacturing in the
Ryan Sweet
incoming data, and forecast changes to clients
US, which went into a recession in 2019, andvery quickly. In the last couple of years, it has been very important
agriculture was hit hard. So the two industries that were supposed tobecause things have been changing pretty quickly.
benefit from the trade war were hurt the most. The economy slowed
I also head up our monetary policy research, so I pay close
down, we came down to roughly 2% growth in 2019, raisingattention to central banks across the globe, but my primary area ofconcerns about a recession.
expertise when it comes to monetary policy is the Federal Reserve.
I don’t expect a recession in 2020 because the traditional causesof recessions in the US in the last 100 years, including an
overheating economy, policy error by the Fed, popping of an asset
Overall Assessment of the US Economy
bubble or spike in oil prices; none of these are threatening now.
in 2020
There are none of the usual imbalances in the economy that could
JS: How do you assess the current US economy?
cause a recession. That doesn’t mean that we couldn’t have a
Many people mention the possibility of a recession inrecession, but I think something would have to go wrong, such as2020, but would you agree?
further escalation in the trade war, which seems unlikely given that2020 is the election year in the US. I don’t think the Trump
Sweet: I don’t agree. I think the economy has clearly slowed sinceadministration is going to escalate the trade war, but it is equally
the beginning of 2019, and there are a few things behind that. Firstly,
unlikely that the US or China will roll back these tariffs. I think thethere has been fading fiscal stimulus. In 2018, the economy was on
key really for 2020 to avoiding a recession is the consumer, and thata sugar high because of the fiscal stimulus backed by thegets back to the job market. As long as the labor market remains in
administration of President Donald Trump, which included corporate
reasonably good shape, most of the fundamentals for consumers
4 Japan SPOTLIGHT • January / February 2020

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suggest that the economy will be able to get through 2020 without arecession.

Policy Uncertainty
JS: My concern is about rising uncertainty in theeconomy today. It is not only limited to the trade war
between the US and China, but other uncertainties
are rising because of some geopolitical risks andalso maybe policy uncertainty which could betriggered by the Trump administration. This
uncertainty could have a negative impact upon
private investment. Would you concur with this view?

Sweet: Firstly, I would point out that policy uncertainty in the US hasremained elevated throughout this expansion, so this is nothing
really new. The new aspect of this now is that there is a tremendous
amount of uncertainty around trade policy and businesses aroundthe US are wondering if these tariffs are temporary or not. We might
have a new norm whereby we have an administration that uses tariffs
to achieve trade policy objectives. The Trump administration does
have some good objectives, such as addressing China’s stealing ofintellectual property, but tariffs aren’t the right way to go about it.
Most economists don’t like tariffs. So from the uncertainty
perspective, I don’t think it is going to decline anytime soon, even if
we get a Phase 1 trade deal, because that trade deal addressed someof the short-term frictions between the US and China on the trade
front, such as getting China to import more agricultural products.
But it doesn’t address the elephant in the room, which is
intellectual property. I have done some work looking at the economic
costs on policy uncertainty and it does have a clear impact on hiring,business investment in equipment and structures. I think that theheightened uncertainty that businesses have had to deal with overthe past two years has weighed on the economy and has contributed
to a slowing of the job market. It is not the only reason that theeconomy is slowing down – we are coming off the fiscal stimulus,
and also fundamentals for business investment have weakened.
All the weakness in business investment is not just attributable topolicy uncertainty; corporate profit margins in the US werecompressing in 2019, and you had some stagnant growth which
impacts business decisions on investing in equipment and software.
There is also a lot of anxiety about a possible recession, and that led
businesses to hunker down a little bit.
I do think that policy uncertainty will remain a drag on theeconomy in 2020 and possibly 2021. Not just because of trade; wehave the presidential elections, which could be contentious, there are
impeachment hearings going on – there are a lot of factors creating
uncertainty. Outside the US you have Brexit. They keep kicking thecan down the road but eventually they are going to have to make adecision. You also have geopolitical uncertainty in the Middle East,
which could lead to an increase in oil prices.

Fiscal Policy or Monetary Policy
JS: Maybe it will not be a recession, but more of a

slowing down of the economy that will be observedin 2020. In that case, do you think the US government
would need to stimulate the economy with somefiscal policy or monetary policy?

Sweet: Let me start with the Fed. The Fed has already cut interest
rates in the US by 75 basis points, which it described as a mid-cycle
adjustment. It was trying to offset some of the impact of the tradetensions on the US economy, not just the direct effects but also thespillover effects from the escalation of the trade war. So the Fed has
cut interest rates three times, so I think they will likely be on holdthroughout 2020 unless there is clear evidence that the economy is
weakening even further or inflation is decelerating. I think the Fed
can feel comfortable right now where policy is – they view it as being
appropriately calibrated – but it will be the first line of defense if theeconomy suddenly does weaken. During an election year, there is notgoing to be a lot of political will to stimulate the economy unless it isclearly falling into a recession. If we get any fiscal stimulus, it will besomething that has bipartisan support such as infrastructure
spending. Such spending wouldn’t start to stimulate the economy till2021 or even 2022. Trump’s administration has talked about tax cuts
2.0 but I just don’t see any fiscal stimulus getting through Congress
during the presidential election year.
JS: In the current situation where interest rates are

already very low, do you think that fiscal policy would
be more effective in stimulating the economy rather
than monetary policy?

Sweet: I think the key will be for monetary policy and fiscal policy to
be on the same page. Throughout most of this expansion, fiscal
policy and monetary policy were not in sync, so while monetary
policy tried to speed up the economy, fiscal policy was trying to slow
it down. For example, during the administration of President Barack
Obama they did some fiscal austerity, which was premature and a
big mistake during the economic expansion. So fiscal policy turned
too restrictive too soon. Where the Fed was trying to slow theeconomy down and make sure that no glaring imbalances developed,
the Trump administration was trying to speed it up through fiscal
stimulus. So I think that going forward it would be in the economy’s
best interest if monetary and fiscal policy were on the same page intrying to stimulate the economy if a recession does occur in 2020 or
2021. I’m not as concerned about how much ammunition the Fed
has, because I think it will reduce the interest rate to zero if arecession occurs. They may do additional quantitative easing,aggressive forward guidance, and then maybe pull some rabbits outof the hat, using yield curve control like what has been going on in
Japan. But that is an option that will give them a tremendous amountof stimulus.
Japan SPOTLIGHT • January / February 2020

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For fiscal policy, I am a little bit more concerned because there is
this growing sense among fiscal policy makers that the US is
running out of fiscal space. In other words, how much moreborrowing can the US government do. We are running large deficits
but I don’t think we are out of fiscal space yet. What is really
important is what the trigger for recession is and appropriately
responding with all hands on deck when that recession occurs
because traditional monetary policy won’t pack as big a punch as it
has in the past.
The US government’s fiscal situation is on an unsustainable
trajectory; in good times we should be trying to reduce the deficit,
but when a recession occurs that changes things. With regards tothe fiscal situation, in the long run it would be ideal if thegovernment could reduce the deficit, but when recession hits it
needs to step in quickly and try to stabilize the economy. We don’t
want a recession, but if it is inevitable, the goal of policy is to limit
the severity and duration of a recession in order to limit the impact
on the economy and consumers. My concern is that there could be aperception that the US does not have enough fiscal space. The issue
with fiscal space is that it is not directly observable – we canestimate it econometrically but it is imprecise science and theconcern would be that if a recession occurred in 2020, somepolicymakers would look around at the deficit and realize that they
can’t do much, and that would have a pretty detrimental effect on theeconomy.
JS: Looking at the longer term, you already mentioned

the possible effects of monetary and fiscal policy.
Generally speaking, most of the OECD nations arefacing strict budget constraint with very few options
for monetary policy. If the economy gets into a
recession, would it be far more lengthy anddisastrous?

Sweet: It could be. I’m not concerned about the Fed’s policy
response in the US, but I am concerned if a recession occurs in 2020
or even in 2021 in terms of what the policy response in Japan isgoing to be, or by the European Central Bank. In Europe, they aregoing to have to put pressure on countries that have fiscal space todeploy in an effort to limit the severity of any recession there. If wehave a recession in the US, the global policy response is going to bevery important. It is very unlikely that the next recession will beanything close to the great recession. In terms of our forecast for theUS, we have eight different alternative scenarios for our baseline,
and we have a next recession scenario, which assumes a slight
downturn. Because we don’t have any glaring imbalances in theeconomy today, or in financial markets, it is unlikely that we will havea recession like the one from 2007 to 2009. It will be painful but it
won’t be the cataclysmic event that we went through in the lastrecession. The policy response is important – when the next
recession ends, the recovery will be slow and gradual, even though it
is noticeably less severe than what we had in the last downturn.
6 Japan SPOTLIGHT • January / February 2020

Global Economy in 2020
JS: What do you think about the global economy? We

have been talking about the US economy mostly, but
at least in 2020 you would not predict a recession in
the US economy. Does that mean you would notpredict one in the global economy?

Sweet: Some countries will experience a recession; already anumber of countries are flirting with a recession. Germany is close tofalling into a recession due to manufacturing struggling and weak
exports. If Germany goes down it will affect many parts of Europe.
How Brexit plays out will determine whether or not the UK economy
can avoid a recession in 2020. If there is a no-deal Brexit, then arecession in the United Kingdom will be very likely, and that could
easily spread into Europe. Even though the global economy is clearlyslow in 2019, it will be slower and weaker in 2020, but it is unusualthat countries all fall into recession at the same time. We can haveperiods where we have a growth recession, where the economy
grows quickly enough to prevent unemployment from rising andinflation is decelerating. China is getting close to that – its economy
has slowed substantially and GDP growth is about 6.5%. If it falls
into the low 5% range, it wouldn’t be surprising if unemployment
started to rise and inflation started to accelerate. Recessions aredefined by two consecutive declines in GDP, which a lot of countries
call a “technical recession”, and it is very unlikely to occur in China.
In the US, you don’t have to have two consecutive declines inGDP; it can just be a period of prolonged economic weakness. In our
forecast, we have GDP growth down to 1.5% or 1.6% next year; itwill feel uncomfortable, but I don’t think we are going to experience a
recession unless something goes wrong on the trade front, or with
Brexit, or there is a flare-up in geopolitical tensions in the Middle
East. In 2020, most of the global economy could have a very
uncomfortable year, with bouts of recession fears. To get through it,some countries are going to need more luck than others.
JS: The Chinese economy is now slowing down. The

US economy will also most likely slow down. Maybe
it is a part of the outcome of the US-China trade war.
In the long run, could this trade war have a serious
impact on the global economy?

Sweet: I would agree with you – a lot of economists will focus on theimplications for GDP growth in 2020 and 2021 – but it is unclear
what the ultimate objective of these trade tensions are. If the Trumpadministration is trying to address intellectual property and otherstructural issues with China, then that is one thing; but if it is trying
to sever ties, then that could have negative and serious
consequences for the global economy. You are already seeing
business respond, by looking for low-cost alternatives to import the
goods that they need to make their products in the US. If Trump winsa second term and we don’t have a trade deal by election day to end

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these trade tensions, then there will be a high possibility of arecession in 2021. Trump won’t have to worry about re-election andcould significantly escalate trade tensions to try to get everythingthat he wants in this deal.

Geopolitical Risks in Economic Forecasts
JS: Geopolitical risks are not limited to the Middle

East or North Korea but are also rising in Latin
America. These risks might have some serious
impact on international trade. I wonder if your team is
now attempting to take these risks into account foryour econometric models or your forecast models?

Sweet: We have a global macro model, so we forecast more than
100 countries, and we are trying to incorporate geopolitical events
into the forecasts. We have created a number of tools to help us
monitor events, such as the currency depreciation index, which lets
us know any potential currency issues that could pop up, and there
are factors such as political unrest that feed into these. Sometimes
these things come out of nowhere. Often with politics andgeopolitical unrest it is very difficult to forecast. A few years ago, theUK decided to leave the European Union but not many people
anticipated that we would still be discussing Brexit in 2020.
JS: Do you think your economic forecasters will needto make more efforts to improve the accuracy of
forecasts by taking many political factors into
consideration?

Sweet: We are always making changes and enhancing the accuracyof our global macroeconomic models. For short-term forecasts wehave other tools such as current quarter models, and a team of
economists who monitor the economy in real time. So we are always
looking very closely at what is going on globally from a politicalperspective, from a geopolitical risk perspective, and we are trying tocreate new tools through our equations and our models to capture
these potential shocks. Forecasting accuracy and transparency isvery important to us; every year we write a forecast accuracy piece
which we provide to our clients so they can see what we got rightand wrong, and which part of our model didn’t do as well as we
anticipated, and then we focus some resources on improving ourmodels. Besides geopolitical issues, we are always looking at trying
to improve the linkages between financial markets and the economy,
because our models for global forecasts view financial market
conditions and then integrate them into the macro economy. The
importance of doing that really was raised following the financial
crisis. I think that a lot of the economic forecasting models didn’t
really capture the direct impact and the spillover effects of financial
market conditions onto the broader macro economy.

Growth Potential of US Economy
JS: You mentioned that in 2020, the US economy will

return to a normal growth rate, which is supposed to
be around 2%. Does that mean you estimate thegrowth potential to be 2% in the medium-to-longterm? Also, how do you assess the growth potentialof the world economy?

Sweet: Our forecast for GDP growth in the US in 2020 is about 1.5%
to 1.6%, and our estimate for potential GDP growth is 2%. Of coursethat is weaker than what we have seen in the early 2000s, the 1990s,
and the 1980s, but there are structural things in the US economy
that have lowered the economy’s potential. We assume that
productivity growth in the US is weak, the labor force growth ismuch weaker than in past decades, and we have an aging population.
So we don’t think that over the next 5-10 years you are going to see
an improvement in the potential growth rate. However, you have tokeep in mind that the millennial generation is larger than the baby
boomer population, but they are just spread out over a longer periodof time, so we will eventually go from this demographic headwind toa little bit of a tailwind. Consumers have been depressed in the US
since the recession, but hopefully they will start to turn around if theeconomy continues to chug along. I think housing will start toimprove in the medium term. Some of these headwinds are
depressing potential growth now, but will start to shift. Businesses
recently have been investing a lot in intellectual property, and thatshould help boost productivity growth three or four years down theroad. I do think you will see a little bit of improvement in potential
GDP growth but that is still over the horizon and will remain at 2% ora little bit lower for a few years. I don’t have any estimate for global
GDP off the top of my head, but I think it is around 3.5%.
JS: In thinking about growth potential, apart from

population growth, innovation is a very importantfactor. How do you see innovation in the US
supporting growth potential?

Sweet: I am not worried about innovation, and I don’t think it will bea drag on the economy. My one concern would be the little
entrepreneurship rate in the US, as it has been slow to come backfrom the recession, and risk takers are the ones that will boost
innovation down the road. Given the growing share of the techindustry in the US, innovation is not going to be a big issue for
productivity growth down the road. Demographics are more of aheadwind in the next few years than innovation.

Written with the cooperation of Joel Challender, who is a translator, interpreter,
researcher and writer specializing in Japanese disaster preparedness.

Japan SPOTLIGHT • January / February 20207