Almost two years since Donald Trump fired the opening shots in a global trade war, a manufacturing and investment downturn is weighing on the global economy, frightening business and sending financial markets searching for cover. The pivotal moment for the global economy can be traced to the January 2018 World Economic Forum in Davos when Mr Trump sent his allies out with the message that trade tariffs were coming and the “US troops are now coming to the ramparts”.
Ever since, the global outlook has deteriorated. World growth of 3.8 per cent in 2017 is expected by the OECD to decline to 2.9 per cent in 2019. Across the world the story is similar: sectors such as manufacturing, highly exposed to global events, are in or close to recession, while wider economies are propped up by still relatively buoyant labour markets and household spending. In Europe, a boom of 2017 fell away in 2018 with the industrial sector slowing rapidly, led by Germany. In the latest quarterly data, the sector was falling 2 per cent on an annual basis.
In the US, starting in late 2018, manufacturing activity and business investment began to slow until it declined outright in the second quarter of 2019. The manufacturing index from the US Institute for Supply Management, a survey of executives, dropped steadily over the same period until it contracted in both August and September. In China, Premier Li Keqiang admitted last month, it is “very difficult” for the country’s economy to grow at the government’s annual target rate of 6 to 6.5 per cent, citing a “complicated international backdrop”. The deepening trade war with the US has also hit exports and investment by manufacturers, with the biggest hit from new tariffs likely to come in the last quarter of 2019 and the first quarter of 2020, dragging GDP growth “below 6 per cent”, according to UBS.
Financial markets have taken the bad news that is spreading from manufacturing activity surveys to the wider services sector as a sign that the global slowdown is becoming serious, raising fears of a coming global recession — generally described as global growth below 2 per cent a year. The MSCI index of global equities fell 1 per cent last week on the back of weak global manufacturing and service-sector indicators. Yields on 10-year government bonds were near historical lows in many advanced economies, indicating little confidence of a rapid recovery in growth and inflation across advanced economies.
The yields were deep in negative territory for much of Europe, at only 0.46 per cent in the UK and 1.53 per cent in the US. Against this gloomy backdrop Kristalina Georgieva, the new managing director of the IMF, will set the tone for next week’s annual meetings in her first major speech in the role. With the fund bound to cut its forecasts again, her view, in an interview with the Wall Street Journal last week, is that “the global economy continues to disappoint . . . I’m coming when there are clouds and occasional raindrops”.
If storm clouds are gathering over trade, investment and manufacturing, they are not, however, seriously affecting households. Unemployment is at long-term lows in many advanced economies and with real incomes rising, consumer spending is preventing recessionary forces taking over.
The US unemployment rate fell to its lowest level in 50 years at 3.5 per cent in September; UK levels are at 45-year lows; and the eurozone rate of 7.4 per cent in August was the lowest for 11 years and within a whisker of the lowest rate since the single-currency area was created. On Friday, Jay Powell said the economy was “in a good place”, praising what the Fed has called a “high-pressure” labour market. Unemployment has run below the Fed’s long-term projections for two years, making businesses more creative at finding and keeping employees, and more willing to pay for training. “People from low- and moderate-income communities tell us this long recovery . . . is benefiting them and their neighbours,” Mr Powell said. “And people who have struggled to stay in the workforce in the past are getting new opportunities.” It is this strength, which has fed into robust household finances even when companies are on investment strike, that makes Adam Posen, president of the Peterson Institute of International Economics, predict that a global recession is unlikely as a result of the trade shocks since 2018. “You would need a mechanism so that the confidence shock goes from investment to consumption and most of the [mechanisms] are unusual,” he said. “The external [trade] shock is just not big enough.” Similar views prevail in central banks, which are on the front line of responding to the cyclical slowdown.
The Fed has disappointed Mr Trump but has cut rates twice, a response it describes as “insurance” against the trade uncertainty that has depressed business investment. The European Central Bank has similarly loosened policy again, stoking some opposition from within its own ranks, to try to stem the slowdown. But everywhere there are concerns that monetary policy would run short of effective stimulus if the industrial downturn were to gather pace. This is perhaps most notable in China where tight financial conditions have contributed to the slowing economy, due to the ruling Communist party’s “financial de-risking” campaign. As opposed to previous slowdowns — such as 2015 — where China has encouraged banks to step up lending, Beijing has responded by leaning more heavily on the expansion of fiscal policy such as tax cuts. Andrew Polk, of consultancy Trivium China, said: “Chinese officials have shown themselves to be willing to take a chance on an unproven — and likely less effective — set of policy tools even in the midst of heightened uncertainty from US-China trade tensions.” This is likely to meet the approval, however, of the IMF in its annual meetings next week. Its message to world leaders will be that the trade war is having serious effects on the global economy and is threatening a more serious downturn. If dialling back on tariffs and re-embracing globalisation is not possible, countries will need to provide greater fiscal stimulus if they can.
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