We are in the middle of the summer break and the feeling that Keith Wade, Chief Economist and Strategist of Schroders - the well-known English asset management company, founded in 1804 and listed on the London Stock Exchange - conveys between the lines of one of his technical reflections is that the global activity is slowing down.
Indeed, after the rapid recovery of economic activity in 2017, with the global economy at full power, growth was slightly less synchronized in 2018. Activity held up over United States, which recorded a GDP growth of 4,1% in the second quarter, while in Asia and Europe it lost momentum: indicators on short-term activity remain stable, PMI indices are holding up both in developed and emerging markets, while the activity indicator of the G7 countries – developed by the British company and which combines national surveys – signals sustainable growth.
However, there are three factors that could put the global economy on standby and they are as follows according to Wade:
1. China is slowing down. While it recorded GDP growth of 6,7% yoy in the second quarter, higher frequency data point to a more pronounced slowdown, as demonstrated for example by the monthly readings on retail sales, investment and exports in the second quarter.
2. Commodity prices have fallen. Since the end of June, oil prices have fallen by around $5 a barrel and industrial metals have dropped by around 14%. While cheaper oil can help ease inflationary pressures, falling metal prices indicate weaker growth in industrial production. The current price level indicates that G7 output will slow down in the coming months.
3. A stronger dollar will impact the level of activity. The trade-weighted dollar has soared nearly 7% since mid-April, tightening global financial conditions and putting pressure on trade growth.
These factors are interconnected: China is a major consumer of commodities, which tend to come under pressure in periods of dollar strength. The common factor is the effect of trade wars. There is evidence that companies ramped up orders ahead of the June 1 steel and aluminum tariff hike and before the July 5 US-China tariff implementation. Now that the tariffs have come into force, companies are cutting back on buyingie as a result commodity prices have gone through a period of expansion followed by a period of contraction.
Clear evidence of the impact of the tariffs is the sharp drop in the number of licenses to import steel into the United States. Claims spiked before the June 1 tariff hike, declining sharply immediately after. Such a move seems perfectly rational to steel users who would like to avoid the 25% tariff that Donald Trump has imposed on imports. However, this also indicates that trade growth is likely to see a decline in the coming months, and consequently industrial activity as well. On the export side, the US should see a decline in soybean sales as Chinese tariffs take effect.
In the report Wade indicates that we will probably see a slowdown that can be considered a correction, a summer break, rather than a contraction. The US economy appears solid. On the consumption side, confidence persists and expenses are increasing, in a context of strong employment growth, in support of incomes. Meanwhile, US tax cuts will continue to support household and corporate spending. This suggests that the slowdown will be temporary as underlying demand remains stable.
The risk in these forecasts is trade tensions, which undermine corporate confidence. The news that the United States and the European Union have reached an agreement (if only verbally) is positive, but it is today's news that tensions between Washington and Beijing have all but abated.
