Does this chill autumn blast signal an end to the growth cycle?

It is the weekend of a Group of 20 meeting – the finance ministers and central bank governors of what are, more or less, the 20 largest economies in the world gathering in Ankara, Turkey, to debate what they might do about the world economy. Had they been meeting a few weeks ago they might be preening themselves over how well they were doing: decent growth in the United States and UK, signs of a recovery in most of Europe, and solid growth in the two largest Bric (Brazil, Russia, India and China) economies, China and India. There would have been shadows of course in parts of Europe, and in Russia and Brazil, but the outlook would have been pretty upbeat.

Not any more. You don’t have to be a close follower of financial affairs to appreciate the chill wind sweeping across the markets, but this is not just a market thing. Underlying these wobbles is the widespread awareness that the world economy seems to be slowing. That change is most dramatic in China, where official data suggesting growth at 7 per cent does not square with unofficial estimates of around 4 per cent. That is sending ripples through South-east Asia. The European Central Bank has just downgraded its forecasts, and while the outlook for the US and UK remains positive there have been the slight sniffs of concern which were absent in the summer. Whether these are enough to stop the Federal Reserve raising interest rates this month is an open question. US unemployment is down to 5.1 per cent, in the range that is considered by the Fed as full employment. Under normal conditions that would trigger a rise, but with all this other stuff going on the Fed may hold off a bit longer.

The timing of that increase has become a huge issue and, as and when it comes, it will affect the rest of us too. It will, for example, underpin the relatively strong dollar and it will clear the path for our own rate rise in the next few months. But elevating one decision to totemic height is to misunderstand the relationship between the economy and policy. It is a two-way thing. The economy shapes policy as much as policy shapes the economy, often more so. For all the official cars and the faffing about the wording of the communiqué, the G20 ministers and central bankers are not in charge; they respond to what happens.

That leads to what is surely the great economic question of the autumn. Are we catching a glimpse of the end of this cyclical global expansion, or is it a classic mid-cycle pause? My instinct is overwhelmingly the latter – a pause – but let’s look at the arguments.

The expansion is undoubtedly mature. In the US, there are signs that the labour market is tightening and it would have tightened in the UK a lot more had it not been for massive immigration. You can debate as to whether the so-called output gap in the US and here has been closed but it is certainly closing. In Europe, the picture is different, and the debate is about the extent to which the wounds are self-inflicted by poor policy and the extent to which they are endemic. What is clear is that Europe will not grow rapidly enough to be of material help to the world economy in the foreseeable future.

Outside the developed world, China will continue to grow but more slowly, while India is too small an economy to be an engine of more than regional growth. Elsewhere, there are problems too, because Africa and much of Latin America depend on commodity exports, and Russia on energy.

Overhanging all this is a troubling fact: at this stage of the cycle, even after six or seven years of growth, we are still dependent on near-zero interest rates. They are lower than they have ever been in recorded history. Common sense says that cannot continue, and they have already had damaging effects on inequality by boosting the assets of the wealthy. Take away this artificial support and maybe the recovery is over.

Put like this, the outlook is rather glum. Expansions do not stop suddenly, but you could make a decent argument that this one will start to peter out in the next year or so, and when that happens there will be nothing much that the policy-makers can do about it.

But there is a more positive way of looking at the same picture. This starts by noting that even the faster-growing economies are not running at an unsustainable level. For example, the US and UK should be able to continue growing at 2-3 per cent without running into capacity constraints. Europe is nowhere near full output. China will still grow, and as a 4-5 per cent rate would put less pressure on energy and commodity prices than the headlong growth of the past, that reduces the resources constraint on growth globally. Finally, the world may be better able to stand higher interest rates than sceptics believe, because they are so widely expected. Tighter fiscal policy did not derail the expansion, so why should tighter monetary policy?