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Growing economic strains worldwide pose risks for US economy

The impact of Germany's economic contraction on global markets

President Trump’s biggest achievement has been the revival of faster U.S. economic growth, but past performance is no guarantee of future results. The White House should be worried about growing economic strains in the rest of the world, and policy makers need to prepare.
The U.S. is not an island. For now the American economy and especially the labor market seem strong as tax reform and deregulation unleash animal spirits. But the German economy shrank 0.2% in the latest quarter, the first contraction since 2015. Europe's largest economy will still grow this year, but a trade surplus and negative interest rates aren’t a growth tonic. Europe in general seems to be reverting back to its post-crisis mean of meager growth.

Japan contracted 0.3% in the last quarter, perhaps ending its modest growth spurt. Beijing last month said China’s economy grew a surprisingly slow 6.5% year-on-year in its latest quarter, and that official figure is usually an overstatement. Some of this is due to such one-time factors as bad weather, but anxious markets are signaling larger concern. German auto exports are weak, and China is trying to sustain growth without  adding to its debt overhang. The high-yield bond  market has the jimmy legs, and oil prices are down on weaker demand. Even Federal Reserve Chairman Jerome Powell, the insouciant one, on Wednesday called events “concerning.”Add currency shifts to those worry beads, as the U.S. dollar soars. Beijing is trying to stem flight from the yuan, and the pound fell another 1.5% against the dollar on Thursday on Brexit woes. The euro’s decline against the dollar needs particular watching because it’s the world’s most important price and contributes to investment uncertainty. Sharp changes in the euro-dollar rate contributed to the global financial panic in 2008.

European political risks may increase, as Germany could soon gain a new leader and the European Union tries to bludgeon Italy into an anti-growth budget. Prime Minister Theresa May’s government in London is hanging by a thread as she struggles to sell a European Union divorce deal to Parliament. The world’s fifth-largest economy could crash out of its most important trading relationship with no alternative in place. A disorderly Brexit could also usher in a socialist Labour government led by Jeremy Corbyn, and watch the pound fall if that happens. All of this is a warning for Mr. Trump and others in Washington: No moat can protect the U.S. economy, and they need to adapt. Start with the Fed, which should rethink its December rate increase. No other major central bank is likely to raise its rates soon. The Fed needs to weigh whether it should expand the gulf between U.S. and foreign monetary policies at a fragile moment as global investors demand more dollars. Mr. Powell will be wary of seeming pliable amid Mr. Trump’s demands for lower rates, but tighter credit conditions and low inflation support a pause independent of Mr. Trump’s bluster. Now is not the time for a doctrinaire march toward “normalcy,” which the Fed can resume in 2019 if the data warrant. Mr. Trump should also settle his trade tempests. He wants Germany to export less, and look at the result after a quarter of soft auto sales abroad. Trade uncertainty is weighing on business investment much as Barack Obama’s regulatory assaults did. If you’re a CEO and don’t know how global supply chains will be affected by tariffs or new trade deals, you delay investment.

1) What evidence does this article provide to suggest that the US economy will be affected by what other countries are experiencing?

2) How are tariffs and the newly revised NAFTA affecting Mexico and Germany?

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