Half Steam Ahead

Adit JainAdit Jain In a paper entitled Changing Tides (October 2018), I argued that there were discouraging pointers about the United States economy and prospects of a slip into recession by the end of 2020 were worryingly high. Now it would seem that a global slowdown appears likely, as growth drivers across world have begun to moderate. A lot of this has to do with China whose sputtering economy has begun to ruffle those of its trade partners.

As China grapples with a mountain of domestic debt, now estimated to be close to 280% of GDP, the consequent over-investment and concerns around a trade war with America, both factory production and exports have taken a clobbering. National output growth has fallen to its lowest level in 30 years. The purchasing managers’ index is well below 50, indicating a contraction of sorts.

Growth drivers across world have begun to moderate as China's sputtering economy is now ruffling those of its trade partners.

Troublingly, for the rest of the world, the problems of China do not stop at its shores. In a landscape integrated through a complex web comprising of supply chains and financial markets, its woes have spread across Europe, America and Asia and understandably so. China accounts for about a fifth of the total growth in global trade and has played the saviour in supporting demand in times of weaknesses. Japan’s exports are falling and the German economy that grew by a scrawny 1.5% last year is now in technical recession. Exports to China from advanced economies fell by 10%. Apple and Samsung have both issued warnings to investors of a decline in demand. Moreover, overall retail sales have been affected with shrinking consumer confidence.

With a global slowdown now becoming a distressing reality, central banks across the world have rather abruptly changed tack on their monetary policies. The United States Federal Reserve, which began hardening interest rates in 2015 and continued until last year, has more recently offered indications of a rethink in this strategy. Central banks in Asia too have kept rates unchanged after raising them in 2018. The Bank of Japan intends to continue with its asset purchase agenda and a negative interest rates policy. The European Central Bank, after tapering its stimulus, has outlined its intent to keep interest rates low and offer a fresh pack of cheap loans to banks. At a stretch it could restart its bond purchase programme should circumstances so warrant.

The good news for advanced economies is that unemployment is low and wages are rising. For now, that might give a boost to household spending.

The good news is that unemployment remains remarkably low and wages are finally rising. That might give a boost to household spending. But worries about trade, sanctions and Brexit continue, prompting the IMF to lower its 2019 outlook. Eurozone countries grew at their weakest pace in four years with Italy now very much in recession. With political uncertainties and tensions in the major economies including Germany, France and Italy, markets will remain nervous about future growth and consumer confidence. These uncertainties may intensify in 2019, as European parliamentary elections are expected to produce gains for anti-establishment parties, creating further doubts on economic policy. This will dampen new investment as businesses become sceptical on both consumer demand and their operating environment. The Christmas shopping season was weak to begin with and retailers remain bearish on future prospects.

The current global expansion has lasted nine years, against a historical average of four. Everything aside, the laws of probability would favour a slowdown.

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Adit Jain, Editor