Hamish McRae: This is a mid-cycle pause, and that’s positive

The Group of Twenty — the finance ministers and central bank governors of what are more or less the 20 largest economies — duly met in Ankara, Turkey, over the weekend.

Had they met a few weeks ago they might have preened themselves for how well they were doing: decent growth in the US and UK, signs of a recovery at last in most of Europe, and solid growth in the two largest Bric economies, China and India.

There would have been black spots, of course, but the general outlook would have been pretty upbeat.

It is not anymore. 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 is most dramatic in China, where official data suggesting growth of more than 7% do not square with unofficial estimates of around 4%.

This is already sending ripples through south-east Asia. The European Central Bank has just downgraded its forecasts, and although 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 significant enough to stop the Federal Reserve increasing interest rates this month is an open question.

US unemployment is now down to 5.1%, in the range that is considered by the Fed to count as full employment. Under normal conditions that would trigger an increase, but with all this other stuff going on, the Fed might 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 will clear the path for our own first rise in rates in the next few months.

But elevating a single 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 soothing words of the communiqué — “Global growth falls short of our expectations. We have pledged to take decisive action to keep the economic recovery on track and we are confident the global economic recovery will gain speed” — the G20 ministers and central bankers are not in charge. They pretend they are, but actually they respond to what happens.

That leads to what is surely the great economic question of this autumn: are we catching a glimpse of the end of this cyclical global expansion, or is it a classic mid-cycle pause?

My instinct overwhelmingly is that it is 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 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 there 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 there 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 slower than in the past, and India is still too small an economy to be an engine of more than regional growth.

Elsewhere, there are problems, since Africa and much of Latin America are dependent on commodity exports, and Russia is dependent 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.