Global economy tells story of slowing momentum outside the US
There is a significant possibility that the global economy experiences either a gradual slowdown or an outright recession before the end of 2019, writes John Kemp
London — Storm clouds were building over the global economy, even before the brutal sell-off in stock markets over the last 24 hours.
Escalating oil prices, rising interest rates, an appreciating dollar and growing uncertainty about the outlook for international trade are proving a poisonous cocktail for global growth and have been triggered crises in the past.
Economic growth and corporate earnings have remained strong in the US but in much of the rest of the world momentum has been slackening since the start of 2018.
Strong and synchronised growth in 2017 has been replaced by an unbalanced expansion that increasingly relies on US consumers and businesses to be sustained.
• The OECD's composite leading indicator points to a progressive loss of momentum in the advanced economies since the start of 2018 and is now at the lowest level since 2016.
• World trade growth peaked in the three months to January at 5.2% year-on-year but slowed to 3.8% in the three months to July, according to the Netherlands Bureau of Economic Policy Analysis.
• South Korea’s Kospi-100 index, a useful proxy for global trade given the country’s heavy export orientation, peaked at the end of October 2017 and has since fallen to a 17-month low this week.
• Air freight volumes are still rising but more slowly than in 2017, reflecting a mixed outlook for export orders, according to the International Air Transport Association.
• Manufacturers around the world reported global export orders fell slightly in September, for the first time in 27 months, according to the new export orders component of the JP Morgan Global PMI.
These trade-orientated indicators are all correlated closely with one another and with the rate of expansion in the world economy — and they all tell a consistent story of slowing momentum outside the US
The global economic expansion shows signs of increasing maturity with unemployment rates falling to multi-decade lows in many of the major economies, spare capacity dwindling and input prices rising.
Oil prices have risen strongly, especially when expressed in terms of currencies other than the dollar, and are now at levels that have preceded recessions in the past for countries outside the US.
The global economy shows signs of being at a relatively late stage in the cycle and policy makers have made a series of choices that have complicated the outlook still further:
• In the US, the combination of an expansionary fiscal policy (tax cuts) with a restrictive monetary policy (rising interest rates) is causing the real exchange rate to appreciate.
• Dollar appreciation is worsening the US trade deficit while rising interest rates are increasing debt-servicing costs for some of the most vulnerable and overleveraged borrowers in emerging markets.
• Aggressive sanctions on Iran are reducing global crude supplies and using up what remains of the industry's spare capacity, intensifying the upward pressure on oil prices.
• Proliferating tariffs are increasing costs for businesses and sowing uncertainty about the future of global supply chains, which is likely to cause a pause in investment.
• Intensifying superpower competition between the US and China has led to growing concerns about national security and the proliferation of trade and investment restrictions.
• National security officials have increasingly become more influential than economy-focused officials in many countries, reversing the balance of power that had prevailed for much of the previous 25 years.
• Sanctions policies have disrupted supply chains from oil and aluminium to electronics and telecommunications equipment.
• The political environment for business has turned much more uncertain, with increasing country risk and weakening commitment to a rules-based international order.
As the global economic expansion has become longer and memories of the downturn have faded, policy makers have started to take it for granted and have adopted policies that put it at increasing risk.
There is a significant possibility that the global economy experiences either a gradual slowdown or an outright recession before the end of 2019.
Slower growth in economic activity may be needed to ease some of the pressure on oil supplies and in other parts of the supply chain.
Crucially, the threat of slower growth might concentrate the minds of policy makers on the need to provide a more predictable and supportive environment for growth.